羅斯百貨 (ROST) 2009 Q3 法說會逐字稿

Good morning and welcome to the Ross Stores third-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.

At this time I would like to inform everyone that today's call is being recorded.

(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'll begin with a review of our third-quarter performance followed by our outlook for the fourth quarter.

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

Before we begin, I want to note that our comments 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-Qs and 8-Ks on file with the SEC.

We are very pleased with our outstanding third-quarter results.

Earnings per share for the 13 weeks ended October 31, 2009, rose 91% to $0.84 from $0.44 per share last year.

This gain was on top of a 22% increase in the prior year.

Net earnings for the third quarter increased 83% to a record $105.1 million.

Third-quarter sales grew 12% to $1.744 billion, with comparable store sales up a strong 8%.

For the nine months ended October 31, 2009, earnings per share grew 52% to $2.39, up from $1.57 in the same period last year.

Net earnings for the first nine months rose 44% to a record $299.9 million, up from $208.1 million last year.

Sales for the first nine months of 2009 increased 10% to $5.204 billion, with comparable store sales up 5% on top of a 3% gain in 2008.

Sales for both the third quarter and first nine months were well ahead of plan.

Our ability to deliver compelling bargains to customers while operating the business on much lower inventories remains the primary driver of these outstanding results.

Traffic trends in our stores also have benefited from an increasing number of shoppers that are attracted to our great values.

Year-to-date merchandise and geographic trends continued in the third quarter.

Shoes and Dresses were the top performing categories, with strong double-digit same-store sales gains; while the Southeast and the mid-Atlantic were the best regions, with comparable store sales up in the low double digits.

California's same-store sales grew by 8% in the period.

Our record third-quarter earnings were driven by both stronger than planned sales and better than expected profit margins.

Earnings before interest and taxes grew about 385 basis points to 9.9% due to a 340 basis point improvement in gross margin and a 45 basis point decline in, selling, general and administrative costs versus the prior year.

The gross margin improvement benefited from a combination of significant merchandise gross margin gains; much lower than expected shortage results; a decline in freight and distribution expenses as a percent of sales; and leverage on occupancy costs.

John will provide some additional detail about operating margin trends in a few minutes.

At the end of the third quarter, total consolidated inventories were down 7% with average selling store inventories down about 15%.

Packaway was about 32% of total inventories, down from 33% at the end of last year's third quarter.

We opened 18 new locations during the third quarter, 16 Ross and two dd's DISCOUNTS; and ended the period with more than 1,000 stores.

We also are pleased to report that dd's DISCOUNTS' outstanding first-half sales and profit performance continued in the third quarter with results for both the quarter and the year-to-date periods well ahead of our expectations.

This improvement is still being driven by both higher sales productivity and much stronger gross margins.

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

Our value-focused merchandise offerings at dd's are resonating well with customers, and we are targeting ongoing improvement in both sales and profitability in the fourth quarter and into 2010.

The earnings drag from dd's is now projected to be 5 basis points or less in 2009.

This represents significant progress over the approximate 35 basis points drag in 2008, making us even more enthusiastic about dd's long-term growth prospects.

As a result, we plan to accelerate the growth of this promising business beginning in 2010.

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

Both our balance sheet and cash flows remain healthy.

We ended the quarter with $577 million of cash and short-term investments.

Our cash position is benefiting from the much stronger than expected earnings year to date as well as reduced working capital needs from operating our stores with lower inventories.

We continued to return excess cash to stockholders through both our dividend and stock repurchase programs.

During the third quarter and first nine months of 2009, we repurchased 1.6 million and 5.8 million shares of common stock, respectively, for an aggregate purchase price of $75 million in the quarter and $230 million year to date.

We remain on track to complete the remaining $70 million authorization by the end of the fiscal year.

Let's turn now to the upcoming holiday season.

As we enter this important period, we remain well positioned as a value retailer, and our stores are stocked with fresh and exciting assortments of terrific namebrand bargains.

That said, with a still uncertain economic climate we believe it is prudent to maintain our prior forecasts for both sales and earnings.

For the 13 weeks ending January 30, 2010, we continue to forecast same-store sales gains of 5% to 6% and earnings per share in the range of $0.88 to $0.94.

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

Thank you, Michael.

As Michael mentioned, third-quarter operating margin improved by about 385 basis points due to a 340 basis point decline in cost of goods sold and a 45 basis point increase in selling, general, and administrative costs.

The largest component of our better than expected improvement in gross margin was much higher merchandise margin, which grew about 145 basis points before the benefit from shrink and freight.

Again, the key driver was faster inventory turns that resulted in much lower markdowns.

As we noted with our September sales release, we completed our annual physical inventory of stores during the third quarter, which resulted in significantly lower than expected shortage.

In the third quarter we realized about 100 basis points of margin benefit from shrink on top of a 35 basis point improvement in last year's third quarter.

Compared to our year-to-date accrual, this lower shortage added about 11 $0.11 in earnings per share to our third-quarter 2009 results.

We believe that efficient execution of our shortage control initiative was a key driver of this improvement.

We also think that our results benefited from the large reductions we have realized in selling store inventories.

As expected, freight cost in the quarter declined about 40 basis points due to a combination of lower oil prices and improved transportation rates compared to last year.

With the robust 8% increase in same-store sales in the third quarter, we also had about 40 basis points of leverage on occupancy expenses.

Finally, improved supply-chain efficiencies are shifting some distribution costs from the third quarter into the fourth quarter of this year.

This timing issue benefited the third quarter by about 25 basis points and is expected to reverse in the fourth quarter and be neutral on the year.

Partially offsetting these favorable results in our third-quarter cost of goods sold was a 10 basis point increase in buying expenses from higher incentive costs.

Selling, general, administrative costs declined 45 basis points in the quarter compared to the prior year, due to a combination of sales leverage and strict expense control.

A 55 basis point decline in store operating costs and 10 basis points of leverage on general and administrative expenses were partially offset by 20 basis points in higher incentive costs.

As expected, lower interest rates on our cash balances versus the prior year resulted in net interest expense of about $1.9 million in the period.

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

Moving on to our fourth-quarter guidance, as Michael noted, we continue to project a same-store sales increase of 5% to 6% and earnings per share in the range of $0.88 to $0.94 for the 13 weeks ending January 30, 2010.

This forecast represents a 16% to 24% increase over $0.76 for the same period last year.

Operating statement assumptions that support this EPS guidance are as follows.

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

By month, we are planning comparable store sales to be up 5% to 6%; 6% to 7%; and 4% to 5% for November, December, and January, respectively.

Operating margin, which increased about 240 basis points in the first nine months of the year, is expected to increase about 40 to 80 basis points in the fourth quarter to 9.5% to 9.9%, up from 9.1% last year.

Based on our year-to-date trends, we are planning solid gross margin gains and a favorable shortage provision versus last year's fourth quarter.

However, considering that the holiday season is typically the most competitive period of the year, we are planning slightly less improvement in gross margin than was realized in the first nine months of 2009.

We are also projecting some leverage on occupancy and store costs.

These forecasted gains are expected to be partially offset, mainly by increased incentive and distribution costs.

As we have said before, there are a number of quarterly expense comparison and timing issues impacting the fourth quarter.

Let me explain the largest differences.

First, freight costs year-to-date were up about 60 basis points, lower than the prior year due to a combination of favorable fuel and transportation rates.

Fuel costs started to decline in last year's third quarter and bottomed for the year in the fourth quarter of 2008.

So as previously communicated, any benefit from freight in this year's fourth quarter is expected to be negligible.

Second, incentive cost comparisons become much more challenging.

Year-to-date incentive comps in 2009 are up about 25 basis points over the prior year.

In the fourth quarter, we expect these expenses to increase about 60 to 70 basis points versus last year.

In the fourth quarter of 2008, the external economic and retail climate worsened; and our earnings growth slowed significantly from the first nine months, leading to much lower incentive comp for that period.

Third, there are timing issues around distribution costs in the third and fourth quarters.

These costs were flat in the first half and are projected to be flat for the 2009 fiscal year.

However, as I mentioned earlier, distribution costs in the third quarter were about 25 basis points below last year, mainly due to improved supply-chain efficiencies that are allowing us to flow product to our stores even closer to need.

As a result, more of our holiday receipts are being processed in the fourth quarter this year versus the third quarter last year.

So distribution costs, which where about 10 basis points lower in the first nine months of 2009 versus the prior year, are forecast to be 25 to 30 basis points higher in the fourth quarter versus the same period in 2008.

Turning back to the rest of our operating statement assumptions, net interest expense for the fourth quarter is planned to be approximately $2 million, and our tax rate is expected to be about 38%.

We also are forecasting weighted average diluted shares outstanding of about 124 million.

Based on our record sales and earning results for the first nine months, along with our forecast for solid growth in the fourth quarter, we are now projecting earnings per share for the fiscal year ending January 30, 2010, to show a robust increase of 40% to 42% to $3.27 to $3.33, compared to $2.33 in fiscal 2008.

Now I'll turn the call back to Michael.

Thank you, John.

We believe the main reason for our exceptional performance year to date has been our ability to execute our strategies with unwavering focus and discipline throughout all areas of the Company.

This has enabled us to capitalize on our favorable position as a value retailer in today's challenging economic environment.

By consistently stocking our stores with great bargains, operating our business on lower inventories to drive faster turns and lower markdowns, and strictly controlling expenses throughout the business, we have been able to deliver outstanding sales and earnings results.

We know that our ability to deliver the best values possible on a wide array of bargains for the family and the home is and always will be the key to our success as an off-price retailer.

To ensure that we have plenty of access to enough quality namebrand products to grow profitably in the future, we are making further significant investments in our merchandise organization.

Increasing the number of Ross and dd's merchants enables us to expand our market coverage in the vendor community while enhancing relationships with a broad array of both existing and new manufacturers.

We currently have hundreds of merchants sourcing product every day from thousands of vendors.

As previously mentioned, another key driver of our much stronger results to date in 2009 has been the significant gains in merchandise gross margin.

This is due to our ability to buy great product while maintaining excellent control of our inventories in all areas of our business.

Moving forward, our objective is to buy even closer to need and to turn our merchandise even faster, to maximize the amount of fresh and exciting bargains in front of the customer.

We believe we can achieve this through continued strict inventory management and the gradual benefits we expect to realize from our micro-merchandising initiative.

Today we operate a total of over 1,000 Ross and dd's locations in just 27 states, giving us significant room for growth going forward.

As previously communicated, we are planning total store growth to remain in the 4% to 5% range for Ross and dd's combined in 2010.

We now expect to enter new markets for Ross in 2011, when total unit growth is projected to increase to about 7%.

Ultimately we believe that Ross can be a chain of at least 1,500 locations and that dd's DISCOUNTS has the potential to grow to about 500 stores.

Longer term we also believe that our projected level of profit margin for 2009 is not only sustainable but has room for some further incremental improvement.

As a result, we believe that earnings per share growth of 10% to 15% over the next few years is a realistic target.

In closing, I want to reiterate that our historical results over many years show that we have an excellent business model with the proven ability to deliver solid sales and earnings gains in both healthy and more challenging economic cycles, and with exceptional cash flow and very strong returns on equity and assets.

That said, while we are thrilled with the outstanding results we have delivered thus far in 2009, we also recognize that we must continue to implement our off-price strategy with constant discipline and unrelenting focus.

We know that this is the key to delivering consistently strong financial performance and maximizing shareholder returns over 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 Klinefelter, Piper Jaffray.

Yes, thank you and congratulations on a great year-to-date, everybody.

A question for, I guess Michael and John, both of you or however you want to split it.

But could you put a little bit more context around the op margin comments that you made?

I think it's important to appreciate how you not only sustain but expand those margins from the very high levels this year.

Maybe something around comp sensitivity or maybe contrasting the business model today in terms of the efficiencies versus several years ago when you last had a prior peak op margin.

Sure, Jeff.

Relative to the operating margin clearly the strongest driver has been our ability to reduce inventory levels while still maintaining and [excelling] the sales line.

So most of that operating margin, the year to date and also in the third quarter, has been from that factor.

We've also maintained a strict eye on expenses throughout the model.

So as Michael mentioned, we feel very good about where we are.

We believe those levels are sustainable going forward.

But we do believe there is still a bit more room to take inventories down, which should drive further improvement in both -- in operating margin.

John, could you also just comment, maybe more specifically than on Q4?

You are looking for a pretty material comp improvement, obviously, year-over-year.

Where is the conservativism within your guidance and where will the potential upside come from?

Is it purely just going to be a comp over your guidance?

Or are you also being cautious about reserving promotional dollars at this point?

So as it relates to the fourth quarter, on a 5 to 6 comp we have not changed that guidance.

Obviously, there is a lot of it more to go.

If we were to do better on the top line, clearly the bottom line will come.

We believe we are appropriately conservatively positioned going into the season.

As I mentioned in the prepared remarks, we are up against some headwinds that we haven't had in other quarters, meaning that freight normalizes and our incentive plan will take away about 60 to 70 basis points in operating margin improvement.

And also we mentioned the shift in distribution center costs into the fourth quarter from the third quarter, which we believe is a positive, as we're processing those units closer to need.

So it's the combination of those factors somewhat dampens our operating margin gains that we have in the past.

But we still believe that for the year we will deliver very, very meaningful earnings per share growth.

Okay.

Great.

Thank you.

Jeff Black, Barclays.

Hey, thank you.

Good morning, guys.

On the dd's, Michael, could you remind us just what is the demographic target of that versus your core Ross?

In the areas you are moving into, or plan to, on the rent costs are you seeing relief there?

And finally on the profitability at dd's versus Ross, are you seeing four-wall profits that would match a Ross?

Or are you still saying there is a 30 basis point difference in dd's versus a Ross long-term?

Thanks.

Okay, Jeff.

This is Michael O'Sullivan.

I'll try and answer those questions.

On the demographics, we have said in the past we think dd's has a more ethnic and lower income customer.

As you know, over the past couple of years we've kind of refined that target profile and sort of narrowed it slightly.

But it's still very much an ethnic customer.

The profitability of dd's on a four-wall basis is comparable with Ross, to answer the second piece of your question.

And on the rent in some of these markets you are moving into, is the case now that you are seeing lower rents and we can -- is that the reason we are building out faster?

The rent is a relatively small piece of why we are rolling out faster.

The reason why we are rolling out faster is we are very excited about the content overall in terms of its appeal to customers, its sales, and its margin.

And obviously, rent sort of plays a role in the profitability, but it's a relatively small driver of why we are rolling out more rapidly.

Fair enough.

Good luck.

Laura Champine, Cowen and Company.

Good morning, guys.

This is a follow-up on the SG&A comments.

I've heard your discussion sort of the puts and takes there in Q4.

But have you given specific outlook for SG&A expense as a percentage of revenues in Q4?

And then as we look into 2010, what kind of a comp would you need to keep SG&A cost flat as a percentage of revenues?

Laura, this is John.

We have not given specific guidance as to SG&A.

What we have said is a combination of all those factors should yield operating leverage improvement by about 40 to 80 basis points.

Looking into 2010 SG&A lever is about around a 3%.

A 3% comp is kind of where we are.

Great.

Thank you.

Marni Shapiro, Retail Tracker.

Hey, guys.

Congratulations and good luck for holiday.

I was curious.

You have some great traffic in the stores.

You are clearly getting new customers into the stores.

I was wondering if you are able to even anecdotally discern if she is coming in for kids, for teens, for non-apparel, or is it apparel?

And dresses have obviously -- doing well.

Curious if you have any indication as to what this new customer is coming in for?

And is there a way to use that information to either get more new customers in the store or keep her coming back more frequently?

Really, what we can tell is this customer is coming in for a bargain and looking for value.

They've provided -- they see it across the entire store.

Our business had been -- outside of a few exceptional businesses, the rest of the businesses have kind of moved pretty much along with it.

So I think that's about all we can tell on her.

Are you guys capturing any data on the customer as far as e-mails and things like that, so that you can talk to her directly?

Yes, we have some e-mail databases that we use, and actually we are looking at other things, other initiatives involving more sort of social networking and more e-mail marketing.

Excellent.

Good luck, guys.

Stacy Pak, SP Research Service.

Hi, guys.

Thanks.

I guess one follow-up and then a question.

Just on your comp guidance, would you comment whether November is in line with -- month to date is in line with your guidance, or you need a decel or an acceleration to achieve it?

Then second of all, on '09 and your operating margin, do you believe on an annual basis that the recession that we experienced or the excess inventories that occurred or the bankruptcy were additive to your business this year?

I.e.

that they helped your operating margin.

And how are you thinking about your business differently given some new competitive entrants in California this year?

Thanks.

Okay, on how we're doing midmonth November, our policy is not to comment midmonth.

Relative to whether the recession was helpful, bankruptcies, retailers going out of business, less retailers around is obviously a helpful thing to us.

And their bankruptcies didn't hurt.

Okay?

How do we think about competitors coming into any of our markets?

We think if we do our job effectively that we'll be fine.

As they open their stores, did we feel a little bit of a bump that eases very rapidly?

Sometimes we do, or often we feel a little bump.

But it eases and things normalize in those stores very soon afterwards.

So actually in some ways it makes us a sharper retailer.

I guess follow up on both of those.

Can you kind of quantify how much you think the bankruptcies or the excess inventory or the recession might have added to the business?

And then is there anything you are doing differently in stores, let's say in Southern California, to sort of combat that?

Or are you just sort of operating as usual?

Stacy, it's very hard for us to quantify the impact of the various bankruptcies.

There have been so many.

Mervyn's, and Linens 'n Things, and Steve & Barry's, it's very hard for us to pick out the impact of any of those, other than to reinforce the point Michael made, which is we are pretty sure it's helping our business.

And long term, we're pretty sure that fewer competitors is better.

In terms of picking up those customers, we are fairly confident that we have new customers in our stores this year, some of whom have come from those exited retailers.

The best way to attract those is just to put good assortments, good bargains in front of them.

And we feel like we have been doing that this year.

Okay.

In Southern California, to your question, we're not doing anything differently.

We are trying to operate the best that we can operate in those markets, and that would be it.

Great.

Thank you.

Paul Lejuez, Credit Suisse.

Hey, guys.

Thanks.

Just wondering if you can maybe ballpark for us how much inventories could be down per foot or per store next year?

I think you mentioned that you could still manage inventories lower.

And then also wondering about early thoughts on CapEx for next year.

Next year inventories?

We are still finalizing that.

They will be down mid to high singles probably.

And CapEx, Paul, again, we will come out in January what the specific numbers are, but CapEx will be around a couple hundred million, something like that.

Similar level to this year we came out.

Versus this year?

Sorry, John.

Yes.

Similar level.

I think we started last year $193 million; we will finish the year probably $165 million.

There is some hangover capital that will probably push into the 2010.

But will finalize that, so it's going to be in that ballpark, around a couple hundred million.

Thanks.

Good luck.

Kimberly Greenberger, Citigroup.

Thank you.

Good morning.

Michael, merchandise margin improvement seems to be linked to improving inventory turnover and your ability to wait longer to commit to some of the purchases that you are making.

Based on the amount of excess inventory that you all are seeing in the marketplace, are you still able to push out those buying decisions a little bit later than you did last year?

Or are you starting to have to commit a bit earlier for some of that inventory?

For the most part, it's still the same.

There are a couple of pockets here and there, but for the most part we're able to buy later and get it to the customer closer to need.

Is that a market dynamic and a combination -- combined with your ability to process things quicker through your distribution center?

Or more one or the other?

It's a market dynamic coupled with a buying technique coupled with added on to our ability to process later too.

Great, thanks.

And just one follow-up for John.

The SG&A leverage point, I think you said you need about a 3% comp to get some leverage.

Does that mean that at about a 2% comp you are pretty much neutral?

No, I would say that 3% is pretty much neutral, Kimberly.

I would say that is the kind of a breakeven point.

So 2%, we might delever a tad.

And it varies by quarter, but I think that is just a general statement.

Great.

Good luck with the holiday.

Thank you.

Michelle Clark, Morgan Stanley.

Great, thank you and good morning.

The first question is on ticket and traffic.

Can you break out for us what that was specifically in the quarter?

And then a follow-up on the traffic.

If you look at traffic on a two-year basis, did it accelerate sequentially?

Michelle, on the traffic and ticket, traffic transaction counts are up kind of low double-digit; and ticket was down low singles, which delivered the 8.25.

And on traffic sequentially, yes, it's up sequentially, quarter (multiple speakers).

On a two-year basis it accelerated sequentially?

Yes.

Okay.

Then just one follow-up question.

If you could update us on micro-merchandising initiatives, I know the previous goal had been to roll it out to the entire fleet by year-end.

Is that still the goal?

What benefit have you seen in margins, and what can we expect in fiscal year '10?

Thank you.

Yes, Michelle, it's Michael O'Sullivan.

Actually we're a little bit ahead of that schedule.

We completed the rollout of micro-merchandising around about August of this year.

We are -- and that means that all businesses in the chain are now being planned and trended using micro-merchandising.

We're very happy with what we are seeing.

It's early days.

I think we had always said that we thought it would be 2010 at the earliest before we saw meaningful financial benefit.

But that said, I think given what we are seeing right now, we think it's probably helping.

It is probably making a contribution to the great results we've had.

It's a little difficult given the number of factors that have happened this year.

The trade-down customer, the retailers going out of business, the assortments we have.

It's a little bit difficult to isolate the impact of micro-merchandising, but I think we're seeing enough good things to think it's helping at this point.

Randy Konik, Jefferies.

A question, first on the inventory.

I guess you said that you want to buy more closer to need and what have you.

Can you just -- is there a new level of packaway you are going to be looking towards, or a goal for the future here?

And then just give us the -- if you can, ballpark the margin differential between the packaway and the non-packaway goods.

Then lastly, I guess there is no specific guidance on SG&A dollars.

But should we expect that, I guess, to accelerate in terms of its -- on a dollar basis in the fourth quarter versus third quarter?

Thanks.

Michael, I'll take the packaway portion of this.

Packaway -- we really don't have a set goal.

Okay?

We have a budget, but essentially that budget is built around the quality of what we see of packaway products.

So that number that is in the budget flexes based on quality level of inventory, as I said.

This is John.

On the margin and the SG&A specifically, Randy, trying to get at that.

Sequentially, it's fairly the same.

But obviously over the prior year, we have achieved better leverage.

Again, reminding you that we did make the comment relative to the incentive comp in the fourth quarter, which will be up.

And that expresses itself both in the margin, cost of goods sold line, and also in the G&A line.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone.

Can you talk a little bit?

As you have looked at the stores before and analyzed the profitability by region, new regions, obviously California, how are you thinking about regional profitability?

And what's changed, especially given the systems initiatives and micro-merchandising initiatives?

And has anything changed in terms of dd's, in terms of how you operationally structure that business?

Thank you.

Dana, I'll take the first part of that question, on profitability.

Obviously given the results we have had, all regions are doing very well.

You can probably also infer from the fact that the mid-Atlantic and the Southeast have been performing so well from a comp point of view, that has also been driving their profitability differentially.

So we are very happy with regional profitability.

Can you just repeat the second part of your question on dd's?

On dd's, what are you doing operationally different as you open new stores than what you have been doing in the past to enhance their profitability?

Actually, let me take a little bit of a step back.

We had, as you know, we looked at all aspects of the dd's business last year, and we did a lot of research on the performance of the stores and on the customers, the target customers for dd's.

Based upon that we sort of narrowed the profile, which has clearly had an impact on our real estate strategy for dd's.

We're much more focused now in terms of where we open stores.

I think that's probably the biggest single change we have made in terms of new store events at dd's.

We have made ongoing improvements to the assortments, which has helped to drive dd's performance.

But I think that applies to the comp store as well as the new store.

I would say the biggest single difference for the new stores has been the sort of more targeted or the narrower customer profile that we announced that we are now targeting.

Thank you.

Adrianne Shapira, Goldman Sachs.

Thank you.

Just following up on the inventory topic, obviously you've done a tremendous job on improving turnaround.

I'm just wondering if we look our -- on a two-year basis comps recently have seen some deceleration.

I'm just wondering, is inventory starting to be a constraint at all?

Don't believe so.

Okay.

Then again on a go-forward basis, no change in terms of inventory planning and the ability to drive sales?

No, you know, we think we can turn faster and by virtue of how we buy, if we ever have a feeling -- which I don't believe will be for a while -- that we have cut too far, we buy very close in.

We can correct that very quickly if we ever have that feeling.

But in general, we're very happy with our results for the year.

So a slight deceleration for a month or two I don't interpret as an inventory problem in the least.

Okay, great.

That's helpful.

Then just on the capital side of things, obviously, throwing up a lot of cash and we've seen you have been active on the buyback.

Just help us think about prioritization going forward, especially now with plans to accelerate dd's.

Where does buyback rank going forward?

So, Adrianne, the buyback has always been the residual of the excess cash we throw, after we take care of investments in the business and also in the store growth.

That would be the philosophy going forward, and it has been our practice -- first part of next year we will come out with what we believe those plans will be going forward.

Thank you.

Kimberly Greenberger, Citigroup.

Great, thanks.

John, I just had a follow-up for you on the third-quarter benefit to shrink.

In terms of just helping us think about how that works its way through your quarters in 2010, would that mean that you'll accrue sort of 30 or 35 basis points lower shrink in Q1 and Q2, but you won't necessarily have that big 100 basis point benefit again in Q3 of next year?

Yes, that's about right.

The number is probably between 20 and 30 basis points in Q1, Q2.

We'll take a haircut obviously from where we were reserving last year, but still want to peg it to where we think we are adequately covered.

But I think I agree with your logic, Kimberly.

Other than I don't think it's -- it's probably more like 20, 30 basis points as we go on a bit more conservative.

Okay.

Thanks, John.

(Operator Instructions) Pat McKeever, MKM Partners.

Thank you.

Just wondering.

I know you've had an 8% increase in same-store sales in California, which was right in line with the corporate average.

Wondering if you saw any impact from all of the Kohl's stores that opened in late September in those former Mervyn's locations?

Yes, Patrick, we clearly got some as we looked at -- we didn't see any material impact.

So no material impact at the stores.

How many stores do you have that are close to those 30 or so Kohl's stores?

I mean really close.

I'm not sure I have the number off the top of my head, but you can assume given its California that we have a few dozen.

Okay, thank you.

You have no further questions.

I'll turn the call back over to you, Mr.

Balmuth.

Thank you all for attending.

Have a very good day.

This concludes today's conference call.

You may now disconnect.