羅斯百貨 (ROST) 2009 Q2 法說會逐字稿

Good morning.

Welcome to the Ross Stores second-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.

This call is being recorded and all lines have been placed on mute to prevent any background noise.

(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 Bobbi Chaville, Senior Director of Investor Relations.

We will begin with a brief review of our second-quarter performance followed by our outlook for 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 forecast of aspects of the Company's future business.

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

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

We are extremely pleased to report that earnings per share for the 13 weeks ended August 1, 2009, rose 52% to $0.82 from $0.54 per share last year.

This sizable gain is especially notable considering it was on top of 46% earnings per share growth in the prior year.

Net earnings for the current quarter increased 45% to a record $103.4 million.

Second-quarter sales grew 8% to $1.769 billion with comparable store sales up a solid 3% on top of a 6% gain in the prior year.

For the six months ended August 1, 2009, earnings per share grew 37% to $1.55, up from $1.13 in the first half of 2008.

Net earnings for the first six months rose 29% to a record $194.8 million, up from $150.8 million last year.

Sales for the first six months of 2009 increased 8% to $3.460 million with comparable store sales up 3% on top of a 5% gain in 2008.

This exceptionally strong performance for the second quarter and first six months was well ahead of plan.

Our ability to deliver compelling bargains while operating the business on much lower inventories continues to be the primary driver of our outstanding sales and earnings results.

Second-quarter operating margin grew about 260 basis points to 9.7% driven by a 240 basis point improvement in gross margin and a 20 basis point decrease in selling, general, and administrative costs versus the prior year.

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

For the second quarter dresses and shoes were the top performing merchandise categories with strong double-digit and low-teen same-store sales gains, respectively.

The Mid-Atlantic and the Southeast were the strongest regions with comparable store sales up in the mid to high-single digits.

California same-store sales increased 3% in the quarter.

At the end of the second quarter total consolidated inventories were down 9% with average selling store inventories down about 17%.

Pack away was about 36% of total inventories, down from 37% at the end of last year's second quarter.

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

We are pleased to report that the very strong sales and profit performance in the first quarter at dd's continued throughout the second quarter with year-to-date results well ahead of expectations.

This improvement is mainly due to a combination of higher sales productivity and healthier gross margins.

Like Ross, dd's is also benefiting from our ability to deliver a faster flow of fresh and exciting product to our stores while operating on lower inventory levels.

We are now forecasting the earnings drag from dd's to be 10 basis points or less in 2009 compared to an approximate 35 basis point drag in 2008.

Going forward we will continue to strengthen our dd's DISCOUNTS merchandise offerings with compelling values that appeal to the bargain-driven shopper while keeping inventories below last year's levels.

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

Now let's talk about the Company's financial condition.

Both our balance sheet and cash flows remain healthy.

We ended the quarter with $522 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.

We remain committed to returning cash to the stockholders through both our dividend and stock repurchase programs.

During the second quarter and the first six months of 2009 we repurchased 1.9 million and 4.2 million shares of common stock, respectively, for an aggregate purchase price of $154 million year to date.

We remain on track to complete the remaining $146 million authorization by the end of the fiscal year.

I would like to turn now to our updated outlook for the second half.

As noted in today's press release, we are raising our sales and earnings forecast for the balance of the year.

We believe we are well positioned for the important back-to-school and holiday periods for a number of reasons.

As noted earlier, despite tough prior-year comparisons, we delivered exceptional sales and earnings growth for the first six months.

Going forward we start to anniversary much easier sales comparisons.

After rising 5% in the first half of last year same-store sales were flat and down 1%, respectively, in the third and fourth quarters of 2008.

Most importantly, we are well positioned in the value retailing sector and excited about our merchandise offerings and the availability of great product as we enter the fall season.

As a result, we are projecting comparable store sales for both the third and fourth quarters of this year to increase 5% to 6%, up from our previous range of 2% to 3%.

Based on these stronger sales assumptions, earnings per share for the third quarter ending October 31, 2009, are now forecast to grow 30% to 43% to $0.57 to $0.63, up from $0.44 in the prior year.

For the fourth quarter ending January 30, 2010, earnings per share are projected to increase 16% to 24% to $0.88 to $0.94 compared to $0.76 last year.

Now John will provide some additional color on our second-quarter results and details on our third- and fourth-quarter guidance.

Thank you, Michael.

As Michael mentioned second-quarter operating margin improved by about 260 basis points driven by a 240 basis point decline in cost of goods sold and a 20 basis point decrease in selling, general, and administrative costs.

The very strong and better-than-expected improvement in gross margin was mainly due to higher merchandise margin, which grew about 145 basis points over the prior year.

Again, as Michael noted, the main driver of these results is our ability to deliver compelling bargains while operating our stores on reduced inventory levels.

Freight costs, which declined about 75 basis points, were the next biggest component of the margin improvement during the period.

As we saw in the first quarter, freight expenses benefited mainly from a combination of lower oil prices and improved transportation rates compared to last year.

We also realized about 25 basis points of leverage on occupancy expenses and a five basis point decline in distribution expenses as a percent of sales.

Partially offsetting these favorable margin results was a 10 basis point increase in buying and incentive costs.

In addition, strict cost controls helped to drive favorable expense trends that resulted in approximately 20 basis points of selling, general, and administrative expense leverage in the quarter, mainly in store operating costs.

Lower interest rates on our cash balances versus the prior year resulted in net interest expense of $1.4 million in the period.

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

Now let's turn to our second-half guidance.

While our EPS targets for both the third and the fourth quarters reflect solid year-over-year growth in operating margin, the forecasted improvement is less than we delivered in the first half of the year.

Let me provide some detail on the reasons supporting these projections.

First, freight costs year-to-date are about 70 basis points lower than the prior year due to a combination of favorable fuel and transportation rates versus last year's first half.

In the third quarter this benefit is expected to be about half of what we saw in the first six months as fuel prices started to decline in the third quarter of last year.

In the fourth quarter any benefit from freight is expected to be negligible.

Second, after benefiting first-half margins by about 10 basis points our guidance assumes that shrink costs will hurt profit margins by about 35 basis points in the third quarter and will be flat in the fourth quarter.

This reflects actual shortage results in 2008 that came in lower than what we had accrued over the prior fourth quarter.

Truing up the shortage reserve to these actual physical inventory results benefited the 2008 third quarter by about 35 basis points.

We are optimistic about the progress we are making with our shortage and initiatives and believe we are adequately reserved for shrink this year.

That said, until we complete our fiscal inventory in September we believe it is prudent to assume no year-over-year improvement in shrink, especially considering today's tough retail climate.

Lastly, incentive cost comparisons become more challenging in the back half.

Year-to-date incentive costs in 2009 are up about 20 basis points over the prior year.

In the second half these expenses are planned to increase 40 to 50 basis points over last year's back half when same-store sales and earnings growth slowed, especially in the fourth quarter.

Now I would like to review our third-quarter operating statement assumptions that support our EPS guidance.

Total sales are expected to increase about 9% to 10% driven by a combination of new store growth and as mentioned same-store sales that are up 5% to 6%.

We are forecasting about 18 new stores to open during the period including 16 Ross Dress for Less and two dd's DISCOUNTS.

By month, we are planning comparable store sales in August to be up 4% to 5% on top of a 3% gain from the same period last year.

For September and October we are projecting same-store sales to increase 6% to 7% and 5% to 6%, respectively, compared to a 2% decline in both months last year.

Operating margin for the third quarter is expected to increase about 100 basis points to 150 basis points from 6.1% last year.

Similar to the first half of 2009 and in order of magnitude we are planning this improvement to be driven by a combination of our merchandise gross margins, somewhat lower freight costs, and leverage on selling, general, and administrative expenses.

Net interest expense for the third quarter is planned to be approximately $2 million and our tax rate is expected to be about 39%.

We are also forecasting weighted average diluted shares outstanding to decline 4% to 5% to about 125 million.

Based on our record sales and earnings results for the first six months along with today's higher sales and earnings targets for the second half, we are now projecting earnings per share for the fiscal year ending January 30, 2010, to increase 29% to 34% to $3.00 to $3.12.

This targeted EPS range compares to $2.33 in fiscal 2008.

Now I will turn the call back to Michael.

Thank you, John.

Our exceptional performance to date this year, especially considering the very difficult macro economic and retail climate, reflects that consumers have not stopped shopping, but that they have become more focused than ever on getting the very best value for their shopping dollar.

We believe we are also benefiting from the large number of recent store closures by numerous retailers that have gone out of business over the past several months as their former customers seek new shopping destinations.

As an off-price retailer Ross is very well positioned to take advantage of the increasing number of value-focused consumers today.

To maximize our opportunities in this environment we have continued to do what we do best and have done all year, deliver the most compelling bargains possible in clean, well run, easy-to-stop stores; keep inventories as lean as possible; and strictly manage expenses throughout our organization.

Also, supply of desirable product is very plentiful today.

We have never had a problem acquiring enough quality name brand merchandise to drive our business.

Going forward we will continue to make strategic investments in our merchant organization.

This enables us to continually expand our market coverage in the vendor community while enhancing relationships with a broad network of existing and newer resources.

We currently have hundreds of Ross and dd's merchants combined sourcing product from thousands of manufacturers and vendors.

Our goal is to always ensure that we have as much access as possible to a wide array of fresh and exciting name brand bargains.

Looking ahead we remain confident that the compelling values we offer will continue to resonate with our customers even as the economy improves, as long as we continue to execute our strategies well.

This is and always has been the key to maximizing our prospects for sales and earnings growth while also 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) Jeff Black, Barclays Capital.

Thanks a lot.

Another great quarter, congratulations.

John or Michael, if you could just remind us how much of the product classifications are currently being touched by the micro-merchandising initiative?

And what are the learnings thus far this year as you expand that out?

What I am really getting at is the margin is up at nine-ish this year.

As we look ahead to next year what prevents us from going higher or what gets us to the next level?

Thanks.

Jeff, this is Michael O'Sullivan.

I will answer that question.

We have rolled out micro-merchandising to about two-thirds of the chain in terms of product categories and we expect to have rolled out to the whole chain by the end of the year.

We are monitoring it very closely.

We are very happy with how it's working; it's doing the right things in terms of sending the right product to the right stores.

But that said, we always believed it would take a couple of seasons for it to have an impact, meaningful impact on the stores.

So we continue to believe that you wont' really see a significant benefit until 2010.

In terms of our current business, I think if you are looking for drivers of our current business I wouldn't look at micro-merchandising.

I think it might be having a marginal benefit but the real benefits we are getting are from the lower inventories that Michael mentioned, fresher assortments, the better merchandise, the trade down customer, the exit of the other retailers.

All of those factors, I think, are really what is driving our current trend.

Then just in terms of the comp trend, if you could just comment on what is driving those more specifically -- traffic, full price, etc.?

In terms of comp trends our traffic is up high single digits offset by the basket, which is down low single digits, driving the comp number.

So that trend has continued.

Okay, thanks.

Good luck, guys.

Sean Naughton, Piper Jaffray.

I will also add my congratulations, great job.

Another follow-up on the gross margins, obviously very impressive in the quarter.

Can you remind us -- obviously as the freight benefit mitigates in the back half, can you remind us of the gross margin benefit you had in Q3 and Q4 of last year?

Sure.

You are right, Sean, that freight benefit will decrease somewhat in the back half.

We are looking for about 35 basis points of benefit in the third quarter.

Actually it evens out in the fourth quarter, so we are up against the numbers we had last year.

So roughly no benefit in the fourth quarter.

Okay.

And then obviously it sounds like things are going well at dd's.

Are there any plans to potentially accelerate the store growth within this particular concept?

We are very happy with how dd's has been performing.

As you know we made a number of adjustments to the business last year which we are very happy with.

In addition, I think the economic slowdown has meant that dd's proposition is particularly strong with the customer.

So as we look forward I think it's very likely you can assume that we are going to ramp up that business.

And in the balance of this year we are going to look at what specifically that means in terms of how many stores and what market, so we will work through that.

I think it's a fair assumption that in the next couple of years you will see us take up the growth of dd's.

And then in terms of the overall size of dd's, is it fair to assume that that business could be a few hundred stores or how are you guys thinking about that business?

It's still a relatively new business so be careful with the answer I am going to give you.

But we have modeled it out; we feel confident as probably 500 stores in terms of full potential of dd's.

But as they say, it's early days so it's hard to precise about a number.

Sure, okay.

And then lastly maybe a strategy question on the merchandising.

We have seen success obviously with exclusive brands within the discount and mid-tier channels of distribution.

Do you believe there is an opportunity for Ross to potentially capture some additional margin and mine share from an exclusive brand partnership and is that something you guys are considering?

It's really not in our strategy today.

We still -- our strategy is department and specialty store brands for less.

And we would like to be putting in our store labels that are in other mainstream stores.

Okay, great.

Thanks and best of luck.

Stacy Pak, SP Research.

Thanks.

I guess the first question is just on the merchandise margin in Q2.

It was pretty good performance; I think you said up 145 basis points.

And it looks like it was on a pretty big number last year.

So just kind of wanted to gather your thoughts on merchandise margin potential in the back half.

Is there any reason why that should slow down?

I obviously heard your comments on freight, etc.

Yes, Stacy, as I said, freight is included in that number.

But relative to just flat merchandise margin, we see no reason why we wouldn't continue.

We are pretty bullish on where we are right now from a merchandising standpoint.

Okay, great.

On the dd's I think previously you had said a 20 basis point drag.

Was all of the change in forecast achieved in what you just did in Q2 or is there some improvement that you are projecting going forward?

On the dd's drag?

Yes, Stacy, what we have done is we have taken dd's trend and we feel pretty comfortable with forecasting that trend for the year.

Based upon that updated forecast that is how we get from the 25 to 30 basis points drag that we have mentioned before.

However, we now think it's going to be 10 basis points or less, so it was [barely] forecasting dd's trends continuing for the rest of the year.

So assuming that happens, assuming dd's (inaudible) forecast sale, we are pretty comfortable with that estimate.

Okay.

Can you say what the dd's drag was in Q2 versus last year?

We typically, Stacy, will talk about that number on an annual basis and avoid the quarterly discussions because of the movement between quarters.

Okay.

And then can you also just comment on some of the Ross markets outside of California, what you are seeing, what you are learning, what you are feeling?

As it relates to Ross or dd's?

Are we talking --?

Ross.

Ross, sure.

So our strongest markets are the Southeast and the Mid-Atlantic.

We performed in the mid- to high-single digits in those markets.

In some of the tougher housing markets -- some of the tougher hit housing markets like Florida and the Southwest, they are underperforming the chain but have stabilized.

Okay.

All right, great.

Thank you.

Brian Tunick, JPMorgan.

Good afternoon.

A couple of questions.

I guess your 5% to 6% comp plans for the back half; that sounds like some of the biggest comp plans that any retailer has mentioned for the second half.

Do you guys expect that to be driven from a continuation of dresses and shoes primarily or do you need or you are seeing other product categories starting to show a lift here?

And then the second question on the inventory per stores, where do you think you get to a number where that starts to actually hurt the ability to generate these kind of comps?

And do you expect inventories per store to be able to be down again in 2010 and keep turning inventory faster?

The back half -- shoes and dresses we expect to be very strong, but we are seeing the lift being fairly broad-based across the store.

But certainly shoes and dresses are leading the pack and we would expect them to.

Relative to inventory, we will continue to cut our inventory.

Will there be a place where we can't?

We don't see it yet.

We are going to continue to push the needle.

We are finding a lot of very good things in our stores.

We are getting a lot more fresh product to our stores out of it.

We are certainly financially it's a good deal.

But having a flexible model in terms of merchandise trimming, it all works with what our concept is.

So we are going to continue to push the needle.

And then my final question, on the mid-Atlantic stores where are you from an average productivity and four-wall margin versus the rest of the Ross chain?

Brian, the Mid-Atlantic trend has been above the chain for about 18 months now, so we are very happy with what has been happening in the Mid-Atlantic.

And the mid-Atlantic has also been benefiting from some of the inventory reductions we have taken, so its margin has actually been very strong.

It continues to be below average, but at any one point in time half of our regions are above average and half are below average.

So I think we are pretty happy with its trend and its profitability despite the fact that it's still slightly below average.

Is that giving you more confidence that you can become a national player sooner rather than later?

Yes.

All right.

Thanks and good luck.

Paul Lejuez, Credit Suisse.

Thanks.

It's Tracy Kogan filling in for Paul.

Had two questions; the first is a follow-up on a previous question about margins.

I was wondering if you could give us a sense for what your longer-term operating margin goals are.

We are projecting you this year to be pretty close to your peak and just wondering where you see the opportunity to go there.

And then secondly, wondering what you are seeing on the real estate side and if you may accelerate your Ross openings next year based on getting better deals.

Thanks.

On the margin side, Tracy, clearly we have made a lot of good progress over the last couple of years.

We really haven't reached our peak, which was back in the late '90s -- 10.5% -- but we are a long ways from that point in time.

We don't want to put caps on necessarily that level.

As you have mentioned, our improvement has come from gross margin due to great inventory control.

We do have micro-merchandising coming on line across the enterprise, across the Ross G&A in 2010 which we would expect some increases there.

Having said all that we believe we can sustain current levels and we believe that we can deliver low to mid-teen EPS over the longer term through a combination of store rollout, keeping our eyes on inventory and expenses, and continuing the buyback.

And then, Tracy, on your second question about real estate, obviously there has been a lot of turmoil in the real estate market.

Certainly we are seeing downward pressure on rents as there is more vacant stores in terms of the risk in real estate, but to some degree that is being offset by less new development.

So we are kind of sorting through all that.

I think that said we are happy with our own trend.

As we have said in the past, our plan is to continue to grow Ross Stores in existing markets through 2010 that is still the plan.

So in the back half of this year we will sort of look at the longer-term plan in terms of number of stores and markets.

Thanks.

Good luck.

Michelle Clark, Morgan Stanley.

Thank you, congratulations.

First question is on traffic.

Can you just discuss traffic trends sequentially so how Q2 compared to Q1?

And then I had a follow-up question.

The traffic is -- relative to Q1, Michelle, was up slightly.

We are up kind of high singles Q1, again in Q2.

So sequentially just marginally up.

Okay.

And any specific regions as to where you are seeing that acceleration?

It's pretty much across the board.

Okay.

And then secondly, can you just update us on your leverage points for SG&A?

Is it still a plus-3 comp and then on occupancy?

Yes, both occupancy and expense, kind of over the long-term power our leverage point has been about three.

Obviously this year we have been able to lever at a lower level, but I think for long-term modeling purposes we are looking at three.

Great, thank you.

Laura Champine, Cowen.

Good morning.

I heard in the prepared comments your commentary that although you are seeing some effect of the trade down, you don't think that customer goes away when the economy improves.

Is there any way to quantify the percentage of sales being driven by trade down or how that is impacting your traffic trend?

No, it's very hard to isolate that.

We believe it's happening.

We are seeing good things in terms of traffic which would suggest it's happening, but there are other things happening too.

(technical difficulty) business and we are picking up some of those customers and some share from them.

So I wish we could isolate it, but I just don't think we can.

Richard Jaffe, Stifel Nicolaus.

Good afternoon.

Just a question on dd's DISCOUNTS, can you guys break out some of the metrics there if they have changed at all -- how that compares to Ross Stores in terms of average ticket or average price, units per transaction, the kinds of real estate you have seen that is working out?

I know you have sort of gone through a couple of experimental locations with dd's and it sounds like have settled into a model that works.

Can you give us some sense of how distinguishes itself from Ross and how we can envision the growth for one versus the other?

Rich, on the metrics, we don't typically disclose these metrics.

It's less than 5% of our business so we are not yet at a point where we think an expense to break out those separately.

In terms of the real estate, the real estate profile for dd's is certainly different to Ross.

It tends to be more inner-city, more urban locations, higher density, different kinds malls with different landlords.

It's a 22,000 square-foot box which makes it smaller then Ross, so it is quite a different retail profile.

And the average price remains below Ross Stores, is that reasonable?

Yes, that is true.

The dd's average price has always typically been lower than Ross.

Roughly 20% to 30%, is that a good ballpark?

I think about 20% is about the right number.

Thank you.

Kimberly Greenberger, Citigroup.

Thank you, good morning.

Michael, I was hoping you could address the pricing that is happening in the marketplace.

I guess with the basket in the store down and your merchandise margin up you are getting incredible deals from vendors.

If you can look back at past recessions and see or just let us know how that typically changes through a recovery Is it that the deals maybe aren't quite as good, but the pricing in the entire marketplace firms up so your basket is rather up instead of down?

Could you give me that again, please?

The average ticket is down, but your merchandise margin is up.

So we have to presume that that is because you are getting great deals from your vendors.

Kimberly, just one clarification on the -- although the basket is down, the average price per SKU is roughly flat.

Okay.

So your AUR is flat.

Is the pricing from your vendors been down in order to boost the merchandise margins?

Pricing from our vendors has been actually not down; very well priced merchandise.

Kimberly, what I would say is we are getting the margin improvement through faster turns than lower markdowns.

Most of the benefit we get on pricing we will pass along to the customer; some will see multiple pass-alongs.

And it has really been driven by lower inventory management and quicker turn in the store.

And where are we in that improvement process?

I guess if you could sort of quantify are we 80% of the way there, are we only half way there?

What is the incremental opportunity from here?

As Michael I think answered previously, we will keep pushing it and make that determination.

So don't -- we will make some pretty significant improvements in terms of managing inventories down.

For the back half we expect them to be down kind of similar to the front half and we will keep pushing it.

And then just one last question on dd's.

Previously you had talked about really solid performance in dd's in the state of California with lagging performance outside of California.

Have you seen improvement in those stores outside of California?

Yes.

So the performance in the stores outside of California has been extremely strong.

We are in line with the California stores actually in terms of trends, so we are very happy.

Is there anything you can attribute that to, Michael?

Yes, I think there is a few things I would call out.

As you know, Kimberly, we took a little bit of a step back with dd's in 2007, decided we should really slow down growth of the business a little bit.

We did a lot of research and analysis to make sure that we really understood the customer better.

That led to some changes to our real estate profile and to our merchandise assortment.

We also cut back on inventories very significantly as we did at Ross.

We started to see the benefits of that in the middle of last year and then the economy slowed down.

So I think dd's has also been helped by the external environment.

The dd's customer in particular has been quite squeezed by the economic slowdown and we think the value dd's offers are just very, very strong compared to what else is out there.

Great.

Thank you so much.

Dana Telsey, Telsey Advisory Group.

Good afternoon and congratulations.

Can you talk a little bit about new store performance, what you are seeing?

I know in some new markets you would always want to evaluate how to improve productivity.

Are you seeing improvements there and any update on any of the systems initiatives?

Thank you.

Dana, I will take both of those.

In terms of new stores, yes, we have seen pretty good performance from our 2008 new stores.

And our 2009 new stores we are very happy with, although I have to say they are still very, very, very new.

But we are happy with the trend in new stores.

Then on systems, the major -- I think you are probably referring to micro-merchandising.

The major systems project we have had in the last couple of years has been micro-merchandising.

As I mentioned earlier, we have rolled that out to two-thirds of the chain and to the full chain by the end of the year.

We are very happy with how that is operating, and we think it will have benefits to the business starting in 2010 and then growing over time.

Thank you.

Adrianne Shapira, Goldman Sachs.

Thank you.

Just have a question.

As you look opportunistically in the back half at that 5% to 6% comps, just wondering if you could comment what you are seeing in terms of early back to school trends here in the August month to date?

Thanks.

Adrianne, our policy is really not to comment in month in terms of how sales are going, but clearly as reflected in our guidance we tend to believe that trends should continue from the first half.

And relative to the back half we are up against easier comparisons.

As Michael mentioned in his prepared remarks that gives us confidence to continue the trend.

Great.

And could you just comment in terms of the traffic, any sense new customers, existing customers how you are tracking that?

It's almost impossible to track that.

We know traffic is up.

We are pretty confident some of it is coming from retailers that have slowed down.

We are also confident some of it's coming from our customers who are trading down from other retailers.

But breaking out those individual segments is pretty impossible to do.

Okay, thank you.

Best of luck.

Marni Shapiro, The Retail Tracker.

Congratulations on the great quarter and first half.

A lot of questions have been asked, but I have just one small question.

If you could touch a little bit on the non-apparel areas, (inaudible).

You have touched on a few of them, shoes, but could you talk about the home segment a little bit more.

What is selling at the top of that -- basics or is it more decorative type of stuff?

And if you can talk about things like jewelry and accessories, bags, and things like that.

Okay.

Well, home is fairly broad-based.

For home I would say it's a little less decorative than in prior seasons, but that is the amount of difference.

I think in home we are getting a benefit from stores who have gone out of business, most specifically Linens 'N' Things.

Your second was commenting on jewelry and accessories?

Yes, handbags and things like that, because your assortment has looked pretty good there.

Yes, we have been very happy with the progress we have made there, especially over the last 12 to 18 months.

It's certainly performing above the baseline in the Company and we have been very pleased.

Fine jewelry we have been -- is not a full chain business and the results there, as with accessories, have been encouraging.

Great.

Good luck with the back half, guys.

(Operator Instructions) David Mann, Johnson Rice.

Thank you.

Good morning.

If I could just clarify what you said earlier about inventory per store reduction.

I think in the past you basically said that that would run its course, the benefits from that, by the end of this year.

So is it now the case that you believe that next year that you can take it down and you can see continued margin benefits?

I am not recalling exactly what we have said in the past, but our belief is that we will learn -- we will continue to take it down.

We don't really -- I don't have a view at all that we have hit the bottom.

You mean continue into next year, is that correct?

Yes, continuing into next year.

So you can expect significant reductions the rest of this fall and there will be meaningful reductions next year too.

Okay.

And then in terms of the growth in Ross now are you -- in terms of the store size, given you have taken down inventory so much have you come up with a new prototype size for the store given how much less inventory is going into new stores?

So we operate with a broad range of prototypes to fit whatever market we are going to go into.

Inventory is reflective of where we think sales potential could be so in an area where sales are more robust we would tend to put a larger square footage store.

In an area where we don't think the density is as much we put a smaller prototype in.

So we have a fairly flexible model that enables us to build a right-size building.

Okay.

And then one other question.

On cash flow it looks like you are going to continue to be building cash even with the size buyback you have and the dividend.

Any thoughts about accelerating the buyback given the buildup of cash that is likely to happen with your guidance?

Yes, David, we believe we will complete the buyback we currently have outlined.

We typically address that, the future buybacks, when we go through our planning cycle.

So I would say for the rest of this year we would continue to buyback a dividend program and address that as we end the year.

Very good.

Thank you.

There are no further questions at this time.

Well, thank you all and have a very good day.

This concludes today's conference call.

You may now disconnect.