羅斯百貨 (ROST) 2009 Q4 法說會逐字稿

Good morning.

Welcome to the Ross Stores fourth-quarter and fiscal 2009 earnings release conference call.

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

(Operator Instructions).

Thank you.

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

Balmuth.

Good morning.

Joining me on our call today are Norman Ferber, Chairman of the Board; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President Stores and Loss Prevention; John Call, Senior Vice President and Chief Financial Officer; and Bobbie Chaville, Senior Director, Investor Relations.

We will begin today with a review of our fourth-quarter and 2009 performance followed by our outlook for 2010 and the longer-term.

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

Before we start I want to note that our comments in this call will contain forward-looking statements regarding expectations about future growth and financial results and other matters that are based on management's current forecast of aspects of the Company's future business.

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

These risk factors are detailed in today's press release and our fiscal 2008 Form 10-K, fiscal 2009 Form 10-Qs and fiscal 2009 and 2010 Form 8-Ks on file with the SEC.

Earnings per share for the 13 weeks ended January 30, 2010 grew 53% to $1.16, up from $0.76 for the 13 weeks ended January 31, 2009.

Net earnings for the quarter grew to a record $142.9 million, up 47% from $97.4 million in the prior year period.

For the 52 weeks ended January 30, 2010 earnings per share grew 52% to $3.54, up from $2.33 for the 52 weeks ended January 31, 2009.

Net earnings for fiscal 2009 increased 45% to a record $442.8 million, up from $305.4 million in 2008.

Fourth-quarter sales increased 14% to $1.980 billion with comparable store sales up 10% over the prior year.

For the full year total sales rose 11% to $7.184 billion with same-store sales up 6% on top of a 2% gain in the prior year.

Our better-than-expected sales for both the quarter and the year benefited from healthy traffic to our stores as an increasing number of shoppers were attracted to our great values.

The best-performing merchandise categories for both the quarter and the year were shoes, dresses and home, all posting double-digit gains in same-store sales for both periods.

Geographic trends were broad-based with high single to low double-digit percentage same-store sales increases across all regions for the quarter and mid to high single-digit gains for the year.

The Northwest and Southwest regions were the best-performing markets in the fourth quarter while the mid-Atlantic and the Southeast were the top regions for the year.

California same-store sales rose 8% during the fourth quarter and 6% for the full year.

We are extremely pleased with our outstanding sales and earnings results.

Our 52% gain in earnings per share in fiscal 2009 was on top of a 23% increase in the prior year.

Ross was one of the very few retailers to generate this level of robust growth in 2009.

Our ability to execute our off-price strategy successfully throughout all areas of our company was the primary driver of our exceptional financial results.

During one of the most challenging economic and retail environments, we not only generated much higher than planned revenues, but did so with record merchandise gross margins that drove double-digit operating profit as a percent of sales.

Earnings before interest and taxes for the 2009 fourth quarter grew about 260 basis points to 11.7% of sales up from 9.1% in the prior year.

This higher profit margin was mainly due to a 230 basis point reduction in cost of goods sold along with a 30 basis point decline in selling, general and administrative costs.

For the 2009 fiscal year operating margin increased about 250 basis points over the prior year to 10.1% of sales also driven by a 230 basis point decline in cost of goods sold combined with a 20 basis point reduction in selling, general and administrative expenses.

Key drivers of our improved profitability for both the fourth quarter and the year were significant growth in merchandise gross margin, lower shortage cost and leverage on operating expenses from the strong gains in same-store sales.

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

On average in-store inventories were down in the mid-teen percentage range throughout 2009 and ended the year down about 11%.

Operating our business with much lower in-store inventories increases the percentage of fresh and exciting merchandise that our customers see when they shop our stores.

By exceeding our sales targets with leaner inventories we realized significantly faster turns in 2009 which resulted in much fewer markdowns.

For 2010 we are planning further reductions of in-store inventories with average levels targeted down in the mid to high single digit percentage range compared to 2009.

We believe our ongoing focus on tight inventory management will further accelerate inventory turns and maximize merchandise gross margin.

Turning to our store expansion program, we added 56 new stores in 2009 including 52 Ross Dress for Less and four dd's DISCOUNTS locations.

dd's DISCOUNTS' outstanding performance in 2009 continued in the fourth quarter with sales and profitability for both the quarter and the full year well ahead of our original expectations.

In fact, the earnings impact or drag from dd's was relatively neutral in 2009 compared to a 35 basis point drag in 2008.

We are pleased to report that on a pretax basis before interest costs and corporate overhead allocations dd's DISCOUNTS was profitable for the first time in its history.

This improvement was driven by both higher sales productivity and much higher gross margin.

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

dd's strong gains in sales and profitability also reflect that its value focused merchandise offerings are resonating well with its customers.

These results make us even more enthusiastic about dd's long-term prospects and our plan to accelerate its expansion in 2010 and beyond.

Now let's talk about our financial condition.

Our balance sheet remains very healthy with cash and short-term investments of $770 million at year end.

Our higher cash balances benefited primarily from much better-than-expected earnings as well as reduced working capital needs from operating our stores with lower inventories.

Our consistently strong cash flows enabled us to continue to enhance stockholder returns through both our dividend and stock repurchase program.

During 2009, after internally financing both our working capital and capital expenditure requirements, we used available cash to buy back $70 million of common stock in the fourth quarter and $300 million for the fiscal year.

This allowed us to retire about 1.6 million and 7.4 million shares in the fourth quarter and fiscal year periods respectively.

This completed the prior two year $600 million program announced in early 2008.

In January 2010 our Board of Directors approved a new two-year $750 million stock repurchase program along with a 45% increase in our quarterly cash dividend to $0.16 per common share.

These actions reflect our confidence in our ongoing ability to generate healthy amounts of excess cash and our long-term commitment to enhancing stockholder returns.

Now I'd like to review the 2010 targets we communicated with our January sales release in early February.

We have a resilient and flexible off-price model that, when we execute it well, enables us to deliver solid results in both favorable and challenging business cycles.

That said, we are up against a year of exceptional growth in both sales and earnings in 2009.

As a result we have been prudent in setting our targets for 2010 with the hope that we can do better as we recently did in February when sales were well above plan.

For the 2010 fiscal year we are forecasting same-store sales to increase 1% to 2% on top of a strong 6% gain in 2009 and projecting earnings per share to increase 7% to 12% to $3.80 to $3.95.

It's important to remember that this projected earnings per share growth is on top of an outstanding 52% increase in 2009, our largest annual increase in more than a decade.

We are projecting the largest earnings per share increases in the first half of 2010.

We faced the easiest prior-year sales and operating margin comparisons in the first quarter, providing us greater opportunity for improvement during this period.

For the second quarter earnings per share are forecast to grow in the low double-digit percentage range.

We are up against our toughest sales and merchandise margin and shortage comparison in the third and fourth quarters of 2010.

In the second half of 2009 a 9% increase in comparable store sales and operating profits that grew over 300 basis points as a percent of sales drove a 67% increase in earnings per share.

As a result we are projecting flattish earnings per share in the second half versus the prior year.

Now John will provide some additional details on our fourth-quarter results and review the underlying operating statement assumptions that support our earnings per share targets for the first quarter and fiscal 2010.

Thank you, Michael.

As Michael discussed, our fourth-quarter operating margin increased by 260 basis points over the prior year due to a 230 basis point reduction in cost of goods sold and a 30 basis point decline in selling, general and administrative costs as a percent of sales.

The higher gross margin during the fourth quarter was driven mainly by better merchandise margin which increased about 195 basis points.

Lower shortage and freight added about 25 and 20 basis points respectively to better margins.

The remaining operating margin gains came from the leverage on occupancy, distribution, store and corporate expenses from the robust 10% increase in same-store sales partially offset by higher incentive costs compared to the prior year.

Now I'll spend a few moments summarizing the underlying assumptions that support our 2010 fiscal year EPS targets.

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

Our fiscal year 2010 earnings per share forecast of $3.80 to $3.95 is based on projected total sales growth of 4% to 5% over the prior year driven by a 4% to 5% increase in the number of stores and a 1% to 2% increase in same-store sales on top of a 6% gain in 2009.

Our projected store growth includes about 35 Ross Dress for Less and, as Michael mentioned, 15 new dd's DISCOUNTS locations.

The accelerated growth for dd's includes our anticipated entry into a few new states in the latter part of the year.

We are forecasting operating margin of 10.1% to 10.3% which represents flat incremental growth over 2009 when EBIT grew by about 250 basis points.

Drivers include flattish merchandise gross margin in 2010 with flat to incremental improvement in expenses.

Net interest expense is expected to be about $8 million to $9 million.

Our tax rate is planned to be approximately 38% to 39% and we expect an approximate 4% decline in diluted shares to about 120 million.

Our first-quarter guidance that we issued at the beginning of February was for same-store sales to increase 2% to 3% on top of a 3% increase last year and earnings per share could be in the range of $0.92 to $0.95, up from $0.72 in the first quarter of 2009.

As Michael noted, these targets reflected that we face our [aegis] prior-year sales and operating margin comparisons in the first quarter.

We recently reported February sales that were well ahead of our expectations with same-store sales up 11% versus our forecast for a 4% to 5% increase.

While we are encouraged by the healthy start to the year February is the smallest month of the quarter for both sales and earnings with the important March/April Easter selling period still ahead of us.

In addition, Easter is moving to the first Sunday of fiscal April 2010 from the second Sunday in fiscal April last year, shifting all of our pre-Easter business into March.

Holiday shifts like this are always very difficult to predict.

As a result earlier this month we reiterated our guidance for same-store sales to be up 3% to 4% in March and flat to up 1% in April.

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

Thank you, John.

We continue to believe that the main reason for our exceptional performance in 2009 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 the current economic and retail environment.

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

Looking ahead we believe that consumers' increased focus on value will continue for the foreseeable future which bodes well for our bargain oriented merchandise strategy.

We know that our ability to give our customers the best values possible on a wide array of name brand fashions for the family and the home is and always will be the key to our success.

To ensure that we have plenty of access to enough quality name brand product to grow profitably in the future, we continue to make further investments in our merchandise organization.

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

As previously mentioned, another key driver of our record results in 2009 was the significant gains we realized in merchandise gross margin.

This improved profitability was not only from buying great product but also from maintaining strict controls on merchandise inventories.

We also believe there are additional opportunities to enhance revenues and gross margin over the longer term through micro-merchandising, which was rolled out to all merchandise categories across all Ross locations in 2009.

These tools consist of new systems and processes to help us more accurately plan, buy and allocate merchandise down to a local level.

Building inventory plans from the bottom up ahead of each season and then trending sales and inventory levels against these plans as the season progresses is expected to strengthen our ability over time to get the right merchandise to the right store at the right time.

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

As we have previously noted our planned unit growth of 4% to 5% for Ross and dd's combined in 2010 is projected to accelerate to about 7% in 2011 when we expect to enter new geographic markets for both chains.

There remains plenty of expansion opportunity as we believe that Ross can have as many as 1,500 locations and that dd's discounts can ultimately grow to approximately 500 stores.

That would represent a doubling of our existing store base, an exciting prospect.

Finally, while our 2009 operating margin is close to record levels, we believe that this current level of profitability is not only sustainable but has some room for incremental improvement in 2010 as noted in our guidance.

While our projected earnings per share range for 2010 reflects a slightly lower growth rate than we would normally forecast, we felt that this was appropriate based on the very strong 52% earnings per share gain we are up against from 2009.

Again our practice is to be somewhat cautious in our planning process while constantly striving to beat our targets as we have done over the past couple of years.

Over the longer term we believe that earnings per share growth of 10% to 15% is a realistic and very achievable goal.

The formula remains unchanged, a combination of store growth, comparable store sales gains, flat to incremental improvement in operating margin, generating excess cash that can be used to fund our dividend and stock repurchase programs.

In closing, I want to reiterate that we have a long history of delivering solid sales and earnings gains with very healthy cash flow and returns on equity and assets in all types of economic environments.

We are confident that we can continue to do so in 2010 and beyond.

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

(Operator Instructions).

Stacy Pak, SP Research.

(technical difficulty) questions.

One, John, can you just -- I don't think you told us what occupancy, buying and incentive and distribution costs were in Q4.

And then I'm wondering just sort of how the margin component should play out in 2010.

It sounded like you felt pretty comfortable about Q2.

But the merchandise margin gain in Q2 has been pretty big for two years in a row.

So just kind of wondering about that exclusive of shrink.

And then with regard to shrink, I think Kimberly asked last call how that plays out Q1, Q2.

But how are you thinking about that Q3 and Q4?

Thanks.

Okay, so the first question related to the components of gross margin in the fourth quarter.

As we mentioned in the prepared comments, merchandise margin increased by about 195 basis points.

Shrink was 25, freight was 20, occupancy levered by about 50, the DCs levered by about 15.

Those gains were partially offset by incentive costs in the quarter along with investments we made in the buying organization which totaled about 75 basis points.

So the second --.

On that point right there, John, is there something -- because the occupancy leverage point looks lower or you were getting more occupancy leverage for each comp point in the first half and less in the second half.

Was there something we should be aware of there?

No, I don't believe so.

There have been occasionally some reductions or some cash we received from reduced occupancy percentage and that does vary a bit by quarter.

We don't see that playing out as much in 2010.

Okay.

And then the merchandise margin and the shrink [for '10]?

So the shrink, how that plays out for the year, so, until we take our physical inventory we're accruing at a rate of probably around 25 basis points less than we did last year.

That all trues up in the third quarter depending on where that rate will come in and then we'll go ahead and adjust the fourth quarter amount by whatever we think is appropriate.

So for the first couple of quarters in 2010 we should expect about 25 basis points of benefit.

So in Q3 though when you're up against the big number you got in Q3 '09 you would expect that to be flat or down?

Actually assuming we got the accrual right actually we'd be up against that of the 100 basis points or so benefit we received in the fourth quarter, so it would be actually down.

Okay.

And then just last thing, sorry.

Just the merchandise margin in Q2.

How are you confident you can continue to drive that?

I mean the inventory -- I heard what you said about inventory and that's awesome.

So is that what it is or -- because it looks like a tough compare to me in Q2 just on the merchandise margin exclusive of shrink.

Yes, as we said in the prepared comments, we do believe that the merchandise margins are sustainable.

That's really driven by us managing inventories tightly and in fact in 2010 taking them down some more.

So believe that is sustainable.

Okay, great.

Thank you.

Jeff Black, Barclays Capital.

(technical difficulty) a little bit about the recent performance in women's and dresses in particular and really whether that squares with what we saw across 4Q as we started the quarter.

And back to the margin question, what's the big lever on gross margin as you see it this year?

Is it lower cost of goods and more on that front or is it better full price selling?

Thanks.

Jeff, could you repeat the first part of that question?

Yes.

On the women's category dresses were double digits and a strong driver in Q4.

Has that continued in February and to start the first quarter and are there margin implications to that if the answer is no?

Thanks.

Dresses had a very strong February and dresses really is a key driver of Easter business.

So we'll see how dresses does coming out of Easter, but we feel very confident about the business in dresses.

And, Jeff, I think the second part of your question had to do with what's really driving merchant margin and from our perspective it's inventory control -- taking inventories down, increasing turns in the store that result in less markdowns.

But John, your turns are six-ish.

I mean, how much room is there on that level?

Do see those going to seven, eight, any color on that?

Well, we think there's some more.

We haven't talked it out but we think there's a bit more.

I can tell you we're taking inventories down high single digits this year.

And again, in 2009 they were down kind of mid-doubles so we're pretty confident about our ability to do that.

And just a final tack-on on the dd's stores.

Do you see any differences there on the inventory benefits you've had at Ross, is there an angle on that (inaudible)?

Thanks.

We've taken a similar approach at dd's.

I mean 2009 we reduced the inventory level at dd's as well and saw (inaudible) benefit.

So we're very happy with how dd's has been performing both in terms of top-line and in terms of margins.

Great job thus far.

Thanks, guys.

Brian Tunick, JPMorgan.

(technical difficulty) calling in for Brian this morning.

Two quick questions.

You had commented about the dd's impact this year being flat versus the 35 bps lost last year.

What's your outlook going into 2010 for dd's impact on the margin and would any -- go ahead -- is the benefit coming from better gross margins or are you thinking it is improved leverage from the productivity gains?

No, the first question relative to what we think dd's will do in 2010, we're obviously pleased with the result this year.

We see dd's breaking even and being slightly profitable in 2010.

The gains in dd's actually mirror those that we had in Ross, very, very good solid margin improvements and some leverage on expenses.

All right.

And the second question looking at the March comp guidance, even with the Easter shift benefit, the guidance is implying deceleration from February on one-year, two-year, three-year [stack], however you want to look at it.

Can you just give some color on your thinking there?

As we've looked at the quarter, looked at the year obviously we came up (inaudible) very strong in February.

Our policy is really not to comment midmonth on sales trends.

And so we'll just leave it there right now.

And clearly we want to get through the month and take a look at Easter and then revisit it if we need to.

Thanks, good luck.

Paul [Nicolas], Credit Suisse.

Big picture question on expenses, just looking back to the 2004 time period until today sales are about 50% higher.

The SG&A rate has held constant, it may be even a little bit higher.

I'm just wondering if longer term you see the SG&A rate improving as you continue to grow your store base in sales.

And maybe what's changing?

And depending on your answer to that question, what would be changing over the next several years relative to the last several?

Thanks.

I can comment on that, Paul.

If you go back to 2004, which we don't want to do, things were a little different then.

I think as we look at the expense ratio going forward there are constant initiatives in the Company dealing with labor efficiencies in the DCs and the stores, dealing with transportation optimization, import efficiency.

We have an initiatives around indirect procurement, and we'll continue to make sure that the expense ratios are appropriate in the Company.

Having said that, we will also continue to invest in the merchandise organization which we believe is obviously critical to what we're doing.

Also in 2004, which I don't want to go back to, but we had no bonus in 2004, so there's a piece of incentive comp that was -- that's impacting the ratios currently.

John, not even to focus so much on 2004, just it seems like it's been a pretty steady rate over the past several years.

And I guess I'm really wondering if there's a point over the next several where you see that rate coming down.

Yes, I think when we give dd's more scale that should help.

In those historic numbers that didn't exist.

Also back then I don't know if we had option expensing.

So there are a couple other factors coming into that, Paul.

Okay, thank you.

Adrianne Shapira, Goldman Sachs.

Not to harp on the merchandise margin, but obviously impressed with 195.

Could you give us a sense, is it more driven by fewer markdowns obviously with what you've been doing on inventory turn and how do you think about mark up opportunity going forward?

On the -- the result in merchant margin is disproportionately driven by markdowns.

And relative to markups, if we look at 2010 and look at how we'll plan our AURs, we're flattish in AURs in 2010.

Okay.

And then just following up on that, we had heard in the third quarter ticket was down low singles, traffic was up low doubles.

Could you give us a sense in the fourth quarter what you saw on the ticket side?

It sounds as if still traffic is the major driver, but are you seeing any sort of improvement on the ticket?

So, in the fourth quarter the trends continued, transactions were low double digits and the basket size -- basket was down low single.

So we still have continuing trend we saw in the third quarter.

Okay.

And then just lastly on dd's in terms of obviously a nice improvement in terms of neutral to earnings.

In the guidance of 2010 could you give us a sense of what you're expecting as a contribution from dd's?

Basically flattish.

Okay.

Thank you.

Jeff Klinefelter, Piper Jaffray.

Yes, thank you.

Just a couple quick questions.

One for Michael.

In terms of the competitive dynamic for 2010, clearly you guys were a stand out outperformer in 2009.

It was a very difficult and volatile market in terms of pricing.

But what do you see in 2010 -- if there's going to be a risk out there to not overachieving, is it going back to an irrational pricing environment, are you seeing any inventory builds that concern you with other competitors?

What's your view of the environment?

I think the environment from a promotional aspect -- people have inventory more under control, they continue to run tight inventories and that bodes well as a pricing comparison for the off-price center.

Okay.

So at this point you don't see anything that concerns you on the competitive front?

No.

Okay.

In terms of just the inventory, again great job in managing that, I know you guys have been continuing to drop it without any negative impact on sales.

Are you -- is this the micro-merchandising systems leverage point?

How far along on the continuum are you of realizing the benefits of that system?

Or is this just simply running the business more efficiently in terms of supply chain at this point?

It's a hard question to answer, Jeff.

As you know, we've had micro merchandising up and running across the business since middle of 2009.

We're very happy that it appears to be working well.

But it's too early to tell what kind of an impact it's having on the business.

Frankly there are so many other things that have gone on in the last six months in terms of the inventory cuts we've made, the sales performance we've had that it's very hard to isolate the impact of micro merchandising.

Our own internal view has always been that it would take -- it would take a while before we'd see the benefits, the true benefits of micro merchandising.

But it could be helping, it's just very hard for us to isolate that right now.

I would just add that inventory -- the inventory we've been able to accomplish, micro merchandising is helping, straight and we've got efficiencies in our supply chain to help us be able to do this.

And our view that we were carrying too much inventory.

And also our systems that we put in place in that year we don't like to talk about in 2004 has helped us isolate how we do carry less inventory.

Very good, thank you.

Kimberly Greenberger, Citi.

I was hoping you could give us the longer term view of entering new markets.

Historically when you've entered a new market what kind of sales productivity you've typically realized.

Have you noticed it's an operating margin enhancer or is there some pressure associated with the initial investment in new markets?

If you could just reflect on historically how it's gone for you and help us understand how that might look in 2011, that would be great.

Thanks.

Kimberly, it's Michael O'Sullivan.

The answer is that over the years we've entered a lot of new markets.

So there's been quite a variety of experience.

In some markets we've entered where we've been pretty successful from the starting block, and in other markets where it's taken a bit longer.

The markets that we're looking at in 2011, first of all, they won't really have an impact on 2011, because there will be relatively few stores, few markets.

And obviously we're going to make sure we do as much preparation as possible to make sure that those are the kinds of markets where we have as little drag as possible in the first year or two.

So it's a difficult question to answer because we've had some markets where we've been successful at the get-go and some where it's taken longer.

But Michael, in the variety of experiences have you had an opportunity to look at the new store productivity?

What would be like the best case scenario?

Is that 100% of the sales productivity or is that more like 80%?

And then just maybe if you could help us bracket like the optimistic scenario versus the more conservative scenario, that would be really helpful.

Yes, when it comes to putting numbers on it, I would say you have to assume it will be less than 100%, certainly we would assume it would be less than 100%.

What we're trying to focus on, Kimberly, is actually not so much the first year or two, it's just sort of -- it's more like three to five years out.

What we're trying to get to at that point is a much stronger sales performance.

I don't know if I can really put a bracket around it.

But certainly I think it would be unrealistic to expect that new stores and new markets in the first year or two are going to do as well as (inaudible) markets.

Okay, thank you.

Laura Champine, Cowen & Company.

Good morning, guys.

My question is on SG&A expense, to keep it flat or maybe get a little bit of leverage you'll need less dollar growth in the year.

Is that mostly after you lap the increase and incentive compensation in Q4?

Are there other ways that you plan to control SG&A expense a little tighter in 2010?

As I mentioned there are some initiatives we have in place where we think we could get some traction in SG&A.

And you're absolutely correct relative to incentive cost.

We do lap higher incentive costs that will help us leverage G&A.

Could you give us a little more color on what those initiatives are to try to help control SG&A expense in 2010?

Yes, those I had mentioned, so we're constantly looking for labor efficiencies in the DCs and stores.

There are initiatives around indirect procurement, there are initiatives around supply-chain and efficiencies along the import line, there's work we're doing around transportation as well, so.

And a lot of aspects of the business we keep working at the expense side of the business.

Thank you.

Richard Jaffe, Stifel Nicolaus.

Just a quick question.

dd's discounts obviously moving in the right direction.

Have things changed there that you could talk about, either average ticket or price or merchandise mix, the autonomy of the team or you could (technical difficulty) micro merchandising (technical difficulty) dd's DISCOUNTS?

And then more broadly if you could comment about the sourcing opportunity to get (technical difficulty) much tougher economic environment obviously (technical difficulty).

Are you on a cell phone because it sounds like you are under water.

It is hard for us to (technical difficulty).

Is that any better?

Hello.

Try again.

Okay, I will try and speak up.

This is about all I can manage, I am sorry.

Can you hear me?

Yes.

Thank you.

Just wondering about dd's DISCOUNTS and what might have changed there in terms of sourcing, if the micro merchandising (inaudible) benefit there?

And then you commented broadly on the supply side --.

Richard, I think you may need to try and call back in.

Or you can call one of our investor relations people directly after the call.

Okay.

Thank you.

David Mann, Johnson Rice.

Yes, thank you.

I assume you can hear me okay, right?

Yes, we can.

Very good.

It sounds like you are at an inflection point now with dd's.

And if I remember correctly, you were talking about getting to this breakeven level at a much higher number of stores.

So can you talk a little bit now as you go forward, as you are accelerating store growth there, how the store operating metrics of dd's compare to a Ross store?

Are the returns close to being comparable now?

Okay, David, I will take that.

So yes, as we say, over the last couple of years we have kept dd's at around about 50 stores, and we have been doing some things to try and adjust and improve the performance of the business.

And what we see, we like.

We are very happy with how dd's has performed over the past 18, 24 months, and that is what has caused us to expand the business this year.

So as Michael mentioned in his remarks, we'll be adding about 15 stores this year on the base of 50.

And you can assume we'll continue to grow the business over time.

Obviously underlying all that is quite a lot of financial analysis we've done on the business.

That leads us to think that the returns are very attractive.

And as you know, there are certainly aspects of the financial model that are different to Ross and we've talked about those in the past.

But net-net, in terms of overall return, a dd's store maturity actually throws off very similar returns to a Ross store.

So we're pretty happy with dd's from that comparison.

And then one other question.

In terms of your attitude on packaway, should we expect that the packaway percentages may change at all on an annual basis as micro merchandising and as you continue to take down inventory per store?

I think the real driver of how packaway will move or not will be the quality of what's out there, not based on micro merchandising.

Very good.

Thank you.

Patrick McKeever, MKM Partners.

Just looking at the 200 plus basis point increase in gross margin for the year, how much of that increase do you think was related to the overall weak macro environment, the weak retail environment and department stores or other retailers either shutting down or pushing inventories back to the vendors?

And I ask that because it's a common bearish argument out there right now, that much of the gross margin improvement last year was environmental so to speak.

So I was just wondering if you'd respond to that.

Thanks.

Patrick, I think it's a great question.

We've certainly tried to break it apart and I don't think we really know the answer (inaudible) the external -- the impact of external factors (inaudible) things that we get internally.

The one thing that we can anchor on, which I think is very important, is the inventory reductions we made.

We can link those directly to markdown reductions.

And we know that markdown reductions were the biggest single driver of the gross margin through the past year.

So we look forward to 2010, that's why Michael and John made the comments about additional inventory reductions we're planning to take this year.

So, we feel at least a healthy chunk of the improvement was driven by actions that we took.

And then certainly, we were also helped by (inaudible) environment.

Okay.

And then my second question is on the buying organization.

You made some comments that there were some incremental expenses there.

So just wondering if you could talk about some of the changes or key additions or just changes I guess that you've made in your buying organization over the past few quarters and how you think that might play out in 2010.

I mean, my understanding is that you've made some significant investments in new people and so forth.

So I was just wondering if you could talk about that.

Thanks.

Well, we did in late -- late last year we did promote several people.

We've added more senior management in merchandising, we've also added more divisional merchandise managers and buyers, and actually (inaudible) buyers.

So we've been building the organization in anticipation of our needs for greater market coverage in a competitive environment, in an environment that -- well, in our business, we're essentially built on vendor relationships.

The more people we have covering the markets spending more time with resources we think is a good thing for our business.

So, basically what we've done is we've continued to split our businesses into tighter, into smaller and smaller segments so people are responsible for smaller pyramids so they can focus more on the business as well as vendor relationships.

This additional splitting of the business helps us manage our inventory tighter in addition to -- in addition to our having greater market coverage and we've also added more people in our planning area that match up to the merchant headcount.

So basically we continue to split and split our businesses and then we continue to see a payoff from it.

Thank you, Michael.

Evren Kopelman, Wells Fargo.

Thank you.

Good morning.

A question about the home category.

Correct me if I'm wrong, but it seems like there's an acceleration over the past several months.

Your comps are around 20% or so.

Can you talk about what you think is driving that, how much longer we can see that going forward?

And also remind us what percent of your sales are in the home category?

Okay, the home business is in our -- it's in the low 20% range of our mix.

And the home business has accelerated.

It accelerated in the back half of last year, and it continues certainly into February.

And I would say that what's driving it is we actually did add a lot of merchants there.

We did segment of our businesses tighter.

We also have from a competitive point of view, some retailers have exited the market.

And I think also environmentally people are spending more time at home, all right, less time out and they spend a little more money on home product when that happens.

So, I think those are the reasons.

Okay.

And then on the regions, the Mid-Atlantic and the Southeast, I guess now that they've outperformed I believe they've been closing the gap towards the average -- for the chain in terms of sales productivity.

Can you talk about how much they've closed the gap?

Maybe how much below they are if they still are the corporate average?

Yes, you're right.

Both the Mid-Atlantic and the Southeast over the past 12 to 24 months have been performing very well and we're very happy with how they've done.

What they focus on more than sales productivity is actually their contribution.

And actually from a contribution point of view they're actually right in the pack in terms of competition level.

And that certainly is an improvement over the last few years.

Okay great.

And if I could ask one more.

Last year I remember you talked about tax refunds being higher and as a driver of your business at this time of last year.

What have you seen this year for tax refunds I guess year over year?

We looked at early refunds in terms of drivers of our business.

Clearly there are some early refund activities this year.

It's really very, very difficult to quantify at this point.

Great, thank you.

Robert Samuels, Oppenheimer.

Thanks.

Good morning.

Just quickly, you guys have done a great job in your inventory turns over the last couple years.

And what I would just like to know is how often are you now shipping to the stores?

And with gas prices up rather significantly year over year what sort of impact if any could this potentially have not only on margins but also for your customer?

Thanks.

In terms of -- there are three, I think there were three questions kind of embedded in there.

The frequency of delivery to stores, we deliver to stores every day barring weekends, so every weekday.

I think that's part of our model to make sure that we have fresh merchandise in front of the customer.

Secondly, the impact of the freight prices on our own business in terms of trucking costs, clearly there's some freight expense and we've built that into our budget and our guidance for the year.

Assuming that fuel prices go up this year we've used some assumptions in that process.

And then thirdly I think your question was about the impact of fuel prices on our customers, which is very hard for us to read.

There are so many things affecting our customers.

So it's very hard for us to know how higher fuel prices will impact them, whether it will drive them more to our price or cause them to shop less.

So it's hard for us to know the impact of that.

Any other questions?

Marni Shapiro, The Retail Tracker.

Congratulations on a great quarter and a fantastic year.

Could you just talk a little bit, Richard -- and I never want to go back to 2004, by the way, ever, ever.

Ever, I'm sure Katie feels the same way.

Richard, you mentioned, you talked -- or was it Michael?

One of the guys talked a little bit about the new markets for dd's and Ross and I think you mentioned that there weren't many new markets.

But if you could just remind us if there are new markets or more recent markets that you are opening in this year?

And when you think about dd's could you just talk a little bit about the ideal adjacencies and the kinds of centers that you're opening in?

And are you still seeing the opportunities in those centers the way you saw several years ago?

I'm sorry, Marni, could you just repeat the first part of that?

I got lost on the second.

I think you mentioned that you weren't opening in any new markets this year.

But I was curious if you're opening in any what I would still call newer markets.

That you have a few stores that aren't really mature for the two brands.

And then just again about the adjacencies for dd's and if you're still seeing the same kinds of deals?

Okay, I'll take the first one and then Gary can respond on the second.

On the new markets we're entering, so for dd's this year we will be entering a couple of new markets.

For Ross this year we'll just be in existing markets.

But I think as we announced previously, our intent in 2011 is to begin to enter additional new markets for Ross in that year.

As it relates to dd's adjacencies, we continue to look for more urban locations for dd's.

Those locations tend to be in older centers that require us to do some work on them.

But we found that the density is appropriate for the dd's business model.

And we continue to see those opportunities in the markets that we're operating in and the new markets that we're going to go into.

Is there a demographic that's ideal for dd's or has it become a little bit more broad-based?

Yes there is.

Actually that's one of the things that we did a lot of research on a couple years ago is understanding the ideal demographics for dd's and we do have a real estate profile that lays out the ideal demographic, and that's what we're executing against.

Excellent.

Great, guys, and good luck with the next couple of weeks of Easter.

Thank you.

(Operator Instructions).

Dana Telsey, TAG.

Good afternoon, everyone.

Can you just run through the CapEx breakdown and how that will be split this year?

And then also, in terms of micro-merchandising, which now seems you're gaining the benefits of, what's the next systems initiative that we should look towards?

What's the cost?

And what do you see is the benefit from it?

Thank you.

Dana, I'll take CapEx.

So, this year we're planning around $215 million, the breakout is about $80 million in new stores, we're investing a bit more in new stores as we have to take the ownership for the construction, the buildout of stores, as the credit markets have frozen a lot for new commercial development.

We're going to invest about $65 million in existing stores which includes some touch up work, some refresh, some maintenance work.

A DC is about $40 million and about $30 million in G&A and other IT areas.

And then, Dana, your question on what is next after micro merchandising, I guess I would say a couple of things.

First of all, I think we have a bit of a -- a little bit of time here where we can enhance sort of monetary, enhance the micro merchandising system that we put in.

So I think that's [going to be] a little bit of work.

I think there are some opportunities that we'll find as we do that.

In terms of next systems, there are certainly other things we're looking at and there are even some items that we're starting to roll forward on.

But nothing of the same order of magnitude as micro merchandising -- at least not at this point.

And then just anything with dd's new markets?

As you think about the markets you're currently in versus the new markets, what do you see as the balance in terms of new store openings should be more new markets and should be new regions also?

The balance for dd's certainly this year will be more towards existing markets rather than into new markets.

So new markets will be a piece of it, but it won't dominate.

Thank you.

There are no further questions at this time.

Mr.

Balmuth, I turn the call back over to you.

Thank you all for attending.

Have a good day.

This concludes today's conference call.

You may now disconnect.