羅斯百貨 (ROST) 2010 Q1 法說會逐字稿

Good morning.

Welcome to the Ross Stores first-quarter 2010 earnings release conference call.

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

(Operator Instructions).

As a reminder, ladies and gentlemen, this conference call is being recorded today, Thursday, May 20, 2010.

Thank you.

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

Balmuth.

You may now begin.

Good morning.

Thank you for joining us today.

Also on our call 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 Bobbi Chaville, Senior Director of Investor Relations.

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

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 performance or current expectations.

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

Turning to our results, today, we reported first-quarter earnings per share of $1.16, up from $0.72 per share for the 2009 first quarter.

These results represent an outstanding 61% increase on top of 20% growth in the prior year.

Net earnings for the current quarter -- the current year quarter grew 56% to a record $142.3 million, up from $91.4 million in the prior year period.

Our 2010 first-quarter sales increased 14% to $1.935 billion with comparable store sales up 10% on top of a 3% gain in the prior year.

We are very pleased with our exceptional first-quarter performance, which was driven by robust sales gains and record levels of profitability that were well ahead of plan.

We believe our results continue to benefit from the superior execution of our off-price strategies, combined with our favorable position as a value retailer in the current economic and retail environment.

During the first quarter, we continued to see healthy traffic to our stores as an increasing number of shoppers were attracted to our wide assortments, our fresh and exciting namebrand bargains.

Shoes and Home were the top-performing merchandise categories, both with same-store sales gains in the high teen percentage range, while the northwest and Florida were the strongest regions, posting low to mid-teen increases in comparable store sales.

California, which was impacted by unseasonable weather in April, posted a solid same-store sales gain of 7% for the quarter on top of a 4% increase in the prior year.

Operating margin grew about 320 basis points to a record 12.1% due to a 230 basis point increase in gross margin and a 90 basis point improvement in selling, general and administrative costs as a percent of sales.

Key drivers of our improved profitability in the first quarter were significant growth in merchandise gross margin and leverage on operating expenses from the double-digit gain in same-store sales.

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

As we ended the first quarter, total consolidated inventories were down 1% with average selling store inventories down about 8%.

Packaway was about 33% of total inventories compared to 34% at this time last year.

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

Our customers continue to respond favorably to the higher percentage of fresh and exciting merchandise resulting from our faster inventory turns.

Additionally, our ongoing focus on tight inventory management also helps to maximize merchandise gross margins.

Turning to our store expansion program, we remain on track with our 2010 opening program, adding 14 net new Ross and 2 dd's DISCOUNTS in the first quarter.

We are also pleased to report that dd's DISCOUNTS' strong performance in 2009 continued in the first quarter.

Our accelerated growth plans for this promising business remain on track with a total of 15 new locations planned for 2010.

Based on our first-quarter results and outlook for the balance of the year, we continue to expect dd's DISCOUNTS to be slightly profitable in 2010 before allocations for corporate expenses.

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

The continued solid gains in sales and profitability at dd's also reflect that its value-focused merchandise offerings are resonating well with its customers and we are very excited about our accelerated expansion plans for dd's in 2010 and beyond.

Now let's talk about our financial position.

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

We ended the quarter with $826 million of cash and short-term investments.

Our cash position benefited from our much better than expected earnings and reduced working capital needs as we operate the business on lower inventories.

We also returned a significant amount of our excess cash to stockholders through our dividend and stock repurchase program.

Earlier this year, we raised our cash dividend by 45% and announced a new two-year $750 million stock repurchase program for 2010 and 2011.

During the first quarter, we repurchased 1.8 million shares of common stock for an aggregate purchase price of $94 million and remain on track to complete approximately $375 million of our current authorization by the end of 2010.

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

Thank you.

As Michael noted, we saw healthy traffic to our stores during the first quarter.

Our 10% comparable store sales gain was driven by high single digit growth in the number of transactions, combined with a low single digit increase in the size of the average basket.

Again, operating margin improved by about 320 basis points in the quarter to 12.1%, driven by a 230 basis point increase in gross margin and a 90 basis point decline in selling, general and administrative costs as a percent of sales.

Merchandise margin increased about 130 basis points, including our shortage accrual that was about 25 basis points lower than the prior year.

We also realized leverage on occupancy and distribution expenses of about 70 and 40 basis points respectively.

Partially offsetting these improvements was a 10 basis point increase in freight costs.

The decline in selling, general and administrative costs as a percent of sales was due to a combination of leverage on both store and corporate expenses from the robust 10% increase in same-store sales.

Our buyback program drove a 3% reduction in diluted shares outstanding.

Let's turn now to our second-quarter guidance.

As noted in today's press release, our previously issued guidance for the second quarter remains unchanged.

While we are exceedingly pleased with our excellent start to the year, sales trends in the current macroeconomic and retail climate can be difficult to predict.

In addition, on a two-year basis, we are anniversarying tougher comparisons in the second quarter and same-store sales rose 9% for 2008 and 2009 combined after being up 6% for the first quarter.

We believe that planning somewhat cautiously while hoping to do better is appropriate in this environment.

This practice has enabled us to chase new business resulting in faster inventory turns and better gross margin and expense leverage when we do outperform.

As a result, for the second quarter, we continue to forecast a comparable store sales gain of 3% to 4% and earnings per share of $0.95 to $0.99.

This represents forecasted EPS growth of 16% to 21% on top of an outstanding 52% gain in the second quarter of 2009.

These targets are based on the following assumptions.

Total sales are expected to grow about 7% to 8%, driven by a combination of new store growth and as mentioned, same-store sales that are up 3% to 4%.

We are forecasting about 15 net new stores to open during the period, including 12 Ross Dress for Less and three dd's DISCOUNTS.

We are planning comparable store sales gains of 2% to 3% for May and 3% to 4% for both June and July.

Last year, same-store sales rose 4%, 1% and 4% in May, June and July respectively.

Operating margin for the second quarter is expected to be 10.2% to 10.4%, up from 9.7% last year.

This represents a projected 50 to 70 basis point increase on top of a 260 basis point gain in the second quarter of 2009.

Net interest expense is planned to be approximately $2.5 million and our tax rate is expected to be about 39%.

We also estimate weighted average diluted shares outstanding of about 121 million.

As noted in today's press release, fiscal 2010 EPS is projected to grow 16% to 20% to $4.11 to $4.24, up from $3.54 last year.

This forecasted increase is especially noteworthy considering it is also on top of a robust 52% again in EPS in 2009.

Now I will turn the call back to Michael.

Thank you, John.

I want to reiterate how pleased we are by our excellent start to the year.

Again, while we had planned strong earnings growth in the first quarter, our actual results were even better than expected.

As mentioned earlier, through strong execution of our off-price strategies, we have been able to take advantage of our favorable position as a value retailer in the current economic and retail environment.

Looking ahead, we believe that consumers' focus on value will continue for the foreseeable future, which bodes well for our bargain-oriented business.

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

We remain committed to ensuring that we have access to as wide a supply of bargains as possible by making ongoing investments in our merchandise organization.

A larger number of merchants increases the contact we have with our resources and maximizes our potential to be in the right place at the right time to take advantage of the best value price branded products in the marketplace.

To maximize our prospects for future sales and earnings growth, we will continue our efforts to stock our stores with great bargains, operate our business on lower inventories and strictly control expenses throughout the Company.

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

(Operator Instructions).

Paul Lejuez, Credit Suisse.

Hey, guys, Paul Lejuez.

As you think about the comp progression throughout the year, how do you think about the traffic per ticket?

Can you hang on to the ticket gains that you have seen recently?

And also just wondering, on the Home category, where does that sit as a percentage of total sales versus last year and how high do you think that can go?

Thanks.

So Paul, on your first question relative to traffic and ticket, we have, over the past while, seen increased traffic in the stores.

Our focus is obviously to maintain that traffic.

We are, as mentioned in the recorded comments, anticipating a 3% to 4% comp and that should be a similar traction as to what we have had over the past.

We also mentioned in the recorded comments or the prepared comments that we will see the back half as being relatively flat from a comp standpoint given that we are up against such heavy numbers going into that part of the year.

That is more of a traffic issue though, right, John?

In terms of what?

Traffic issue --

In the second half of the year, the tough compares -- it was driven by -- the comp was driven by traffic last year, correct?

That is correct, it was.

So do you think you can hang on to these ticket gains as we move into the back half?

As we look at it, the idea is to put bargains in front of the customers, obviously maintain our value differential between full-price retailers.

And whether it is traffic or ticket, we will take the comp.

The second part of your question was Home?

Yes.

Home is slightly over 20% of our business and I think it could end up over time probably in the mid-20%s.

What was it last year, Michael?

Excuse me?

What was it last year?

It was in the low 20%s.

Same.

Okay.

Jeff Klinefelter, Piper Jaffray.

Yes, thank you.

Just a question on costs as we go through the year.

A lot of chatter right now from the vendors, all the way back in the supply chain through the retailers about some pricing pressure from various factors -- raw materials, labor, transportation, etc.

In terms of the dynamics with both your preseason and in-season purchasing as an off-price retailer, can you just talk a little bit about kind of what you are seeing or hearing so far and how you expect it to play out over the next couple of seasons?

Okay.

We hear the same chatter that you are describing and we haven't seen any material change yet, a couple of pockets where there have been slight changes.

But for us, our business is a value business based on a differential between ourselves and department stores and other mainstream retailers.

However this plays out, if we do our job effectively and execute our off-price purchasing model correctly, then we will be able to keep the value differential we need from department stores and provide our customers bargains and that is what we are focusing on.

So your view would be something to maintain a similar margin rate.

You will flow accordingly with the other retailers you are competing against?

Pretty much, pretty much.

Kimberly Greenberger, Citi.

Great, thank you, good morning.

John, I was wondering if you could talk about the low single digit increase per average dollar sale?

Was that being driven by a higher average unit retail price or more units per transaction?

And secondarily, it sounds like in 2011 you will be looking to expand into new markets.

Could you remind us how new store productivity looked historically when you have expanded into new markets?

Thank you.

Sure, on the first question, Kimberly, our AURs were slightly up, which was driving the basket slightly up.

And the second question had to do with store productivity levels historically as we've entered new markets?

Right.

I will take that, Kimberly.

Typically, when we enter new markets, our store productivity starts out a little bit slower than existing markets.

But within five years or so, we are -- three to five years, we expect productivity levels to come up close to the average.

Michael, are there any strategies that you could employ as you are entering these new markets that would help smooth the productivity in those newer stores?

Is it a matter of getting to a critical mass of stores so that you can effectively market in that new geography?

Or what are the key drivers of that lower productivity that you might be able to proactively attack on the front end?

The answer to your question is yes, there are and from the experience we have had of entering new markets, we have identified a number of things that we plan to use and prepare for as we enter new markets in 2011.

It includes pretty much all the things you just described in trying to (inaudible) our awareness (inaudible) trying to make sure that the assortment matches the particular needs of the customers in those markets, trying to get to critical mass sooner.

So it really is all of those things as you would expect.

Okay, great.

Thank you.

Brian Tunick, JPMorgan.

Good morning and congrats.

I guess two questions.

So we are going to have this big shrink true-up coming, I guess, right, in the comparison, I guess, wise in the third quarter and I was just wondering how we should be thinking about that and if that sort of takes into consideration this year how you're turning your inventory faster or your speed to market.

So just some color on how you are thinking as we compare against the shrink true-up in the third quarter.

And then maybe for Michael, you are obviously increasingly excited about dd's and maybe if you could just share with us either where productivity is today versus sort of maybe where you think they could get to, the four-wall opportunity at dd's versus Ross.

Just maybe some more metrics around the dd's business.

Thanks very much.

Sure, on the shrink true-up we had last year, it benefited the third by about 110 basis points.

As we plan this year, we accrued at that historic level.

Clearly if we do better than we have done historically, we should be able to pick some up in the third quarter.

But having said that, we are not planning on that at this point in time.

And Brian, on your second question, we are very excited about how dd's is performing in the first quarter and continued to perform well ahead of plan.

So we are very excited about that performance.

You asked about operating metrics versus Ross, I think we said in the past that gross margins are higher at dd's, but operating expenses are also higher.

So in terms of contribution margin, four-wall contribution is very comparable to Ross.

Now obviously, when you run that all the way down to operating margin, because it's a smaller business that isn't yet really at scale, it doesn't have the same operating margin as Ross.

But once we get up to scale and we have a critical mass of stores, we expect the economics to be very comparable and very attractive.

Just a follow-up to that first part.

Just on the inventory turn philosophy and the speed to market, I mean you will continue to run with down inventory per foot in the back half.

Maybe just talk about some of the processes or things that have changed in the organization over the last year or two?

I think your main question there was whether we will continue to run at lower inventory levels and the answer is yes, we will and that will be supported, as you say, by our supply chain being faster than -- by the improvements we have made in terms of supply chain speed.

All right, thanks and good luck.

Adrianne Shapira, Goldman Sachs.

Thank you.

My question related to the SG&A performance.

We saw sort of a similar comp in the fourth quarter and yet you were able to leverage expenses a lot better.

Could you kind of help us understand how that happened?

Are we still at that 3% breakeven comp or are you now able to leverage on a -- are you doing better?

Is that breakeven even lower?

Thanks.

Sure, on the first part of that question, there is always timing differences between quarters, so some of that came into play between the fourth quarter and the first quarter, but we have been able to lower the breakeven point.

It used to be slightly above 3%.

Now we are probably in between a 2% and a 3% on the breakeven point relative to G&A.

And perhaps walk us through that, what the changes were, how have you been able to do that, what areas and how sustainable is that?

Sure.

We are constantly looking for areas to take out costs in the business.

We have done work in productivity in our distribution centers.

We've done work in productivity at a store level.

We have also been very active in the indirect procurement areas as these stores, those things we need, non-merchandise-type items we need in our business.

So those programs have been pretty successful for us.

Evren Kopelman, Wells Fargo Securities.

Thanks.

Good morning, guys.

I wanted to ask, in April, where there was an impact on your business in California and we have been hearing from some other retailers about pressure in May so far, especially in some of the Northern states.

Can you talk a little bit about it?

Is weather impacting your business in May?

I know you are more in the southern market.

So in your markets, are you seeing any impact and kind of what does your May guidance assumes for weather for the month?

Evren, yes, we do think weather had an impact in April and then on May, we actually don't comment late month in terms of May trend.

Okay.

If I could ask another question on the categories.

Shoes has been very strong for you.

Can you talk a little bit about what is driving that?

Are you allocating more space, are you buying from different vendors?

And kind of thoughts on maybe using some of those strategies in the other categories?

Thanks.

We have allocated a little more inventory to it.

We are turning it extremely fast into some key driving trends there and also we have strengthened our merchant organization in shoes.

Stacy Pak, SP Research.

Thanks.

Just circling back one more time on April.

And I am aware of the weather, but in California, I mean do you think the whole -- because I think you did a negative 2, right, in April.

Do you think the whole issue there was weather?

Did you see anything different southern versus northern?

Did you see anything different in sort of non-weather-related categories in California that month, which give you confidence?

And then on your guidance, just given what happened with the Memorial Day shift, what are you contemplating there for the July 4 shift?

Do you expect there to be an impact?

And then the last question is just on ticket, the slight increase you have seen in AUR, is that mix?

What is driving that and are you seeing that in both businesses and just kind of what are you seeing from the consumer in response to price?

Thanks.

Stacy, I will take the first part of that.

In terms of April in California, I would say there was nothing unique about California in April.

The same drivers that were mentioned in the earlier remarks around weather and the timing of the Easter I think applied in California.

I will let John comment on the July 4 shift.

Let me just answer your third question for you on ticket.

The one point I'd make about ticket is on the slight increase that we have seen in ticket this year should be set against the fact that we saw a decline in ticket last year.

So I would just put that in that context.

Do you want to talk about July, John.

So on the calendar shift in the second quarter, Memorial Day, the fact that it is actually in June is slightly beneficial to us in May.

When I say slightly, very slightly, probably less than a point impact in May.

And the Fourth of July shift, its move is pretty minimal as well.

So although those two holidays are moving around, not as big impact in any specific month to us.

I would just add that as a nonpromotional retailer, it has less of an effect.

I guess then I thought that part of the issue on April was you thought that you might have misjudged the Memorial Day shift.

That is not correct?

That was Easter, the Easter shift.

We may have misjudged the Easter shift on how much business moved from month to month between March and April.

Okay, and then just to follow-up on the ticket, is it mix or is it actually price increasing?

It can move around.

It is probably a mix of both.

More inclined to say mix.

Jeff Black, Barclays Capital.

Thanks and congrats on a very nice performance over the past few quarters.

On the sales, retail does seem like we've hit a little air pockets here.

And John, can you give us some clarity on product availability and is it consistent right now with what you would characterize as a move out of past recessions or do you think you are seeing a good healthy level of product availability given some weakness that we have seen elsewhere?

And second, what is the confidence level on the average basket improvement and whether we successfully pass the baton in that direction versus traffic?

Thanks.

Product availability -- I would say availability has been pretty good.

Actually, I would say very good.

And as retailers have hit a bit of a bump, it has gotten better.

And as we kind of expect the year to have decent availability, there was a sense of optimism both from manufacturers and retailers about the year.

And that usually leads to more products being produced by manufacturers and also to some cancellations as we hit some bumps in the road.

Our department stores hit bumps in the road.

So we feel pretty good about what we have been seeing in product and pretty good about the future of product availability for this year.

And Jeff, as it relates to your question regarding traffic versus ticket versus AUR, and your comment whether we've passed the baton or not, we are not sure about that.

It is pretty uncertain out there still.

The economy is tough to judge.

What we are concerned with is making sure that we maintain that value differential when we put bargains in the stores.

Got it.

Well, good job so far.

Thanks.

Good luck.

Marni Shapiro, Retail Tracker.

Good morning, everyone.

Congratulations on a great first quarter and a great string of quarters actually.

I had one follow-up on the weather since it seems to be the topic of conversation today.

I was just wondering if you were still working with weather planners and if they helped at all in the first quarter or if you're not working with them at all?

And then if you would just touch back onto dd's and talk a little bit about some standouts category wise that might have surprised you or that you have added into the mix or is it business as usual there?

On weather, we are still working with analytics and was there a second part of the weather question?

Did it help you at all in the first quarter as we are talking about all the noise here?

It didn't hurt.

I don't recall exactly what they were saying in the first quarter, okay, but overall we find it very useful.

You had raincoats in stock, great.

But they have been very helpful.

And dd's has pretty much been business as usual.

No new categories that we would discuss and the business is pretty much coming at us the way we expected and we have been seeing it growing.

Excellent.

Great, guys.

Good luck this summer.

Michelle Clark, Morgan Stanley.

Good morning.

First question on dd's.

What number of stores do you think you need to hit in order to achieve scale so your EBIT margin is in line with that of Ross Stores?

And then I have a follow-up question.

Michele, I will answer that one.

(inaudible).

In terms of actually a positive profitability, I think we've mentioned dd's is already at positive profitability, just to clarify that.

In terms of seeing the same EBIT margin as Ross, frankly that is tough because Ross is a thousand store business.

So I think as we do our financial projections, it is a few hundred stores before dd's is the same EBIT margin as Ross, but that is a pretty high hurdle.

Okay, and then in terms of your full-year EPS guidance, does that assume any further share repurchase activity beyond the first quarter?

And then into the follow-up to that, if you take the midpoint of your full-year EPS guidance for this year, it implies second-half EPS is roughly flat year-over-year.

So what is driving that conservative outlook?

Michelle, on the first question, the Board approved in January a $750 million share repurchase program.

We plan to execute half of that this year.

I think we expect $95 million during the first quarter, so we have a ways to go.

Our view is we would spend about $375 million for the year, pretty straight line over the period.

You are correct on the second question in your assumption that we are projecting fairly flat comps in the second half and a fairly flat earnings growth.

That is based on a 9% comp increase in the back half of last year and terrific earnings per share performance so we are up against pretty tough numbers.

Just to go back to the second question, the $375 million that you plan to repurchase this year, is that embedded in your EPS guidance for the full year?

Yes, it is.

Thank you.

Laura Champine, Cowen & Company.

Good morning, guys.

You've doing a great job on merch margin, including in Q1.

When you lapse those difficult comparisons in the back half, even though inventory should be down per square foot, is it still possible to pull out a few merchandise margin basis points or do you think we're going to hit the end of that?

No, I think our view is we will continue to take inventory down and turn faster.

So we still believe there is some -- there is a bit more to get out of merchandise margin even in the back half.

Great.

Thank you.

David Mann, Johnson Rice.

Yes, thank you.

Great job, guys.

When you look out preliminarily to next year, do you think inventory per store can continue to decline?

Yes, yes, it might.

It will probably decline at a lower rate than we have been at, but I would expect it to still decline.

Okay, and then --

I'm sorry.

Remember, we have put systems inclusive of micromerchandising that help us get better productivity out of our inventory, okay, by store, by class, by store.

Which is a good segue.

I was curious if you could give us a little more update on where you are with micromerchandising and whether you think you are getting some benefit there this past quarter?

We completed the rollout of micromerchandising in the second half of last year, so we have now had it running for about a season and a half.

We are very happy with it.

We have always thought it would take us a couple of years for it to have a full impact.

But the early signs are that it is helping.

Our performance has been so strong and there have been so many drivers of that performance, like the lower inventory, the economy and merchandise we have, but it is hard to separate out the impact of micromerchandising, but I think we've been very good at that.

And then one other question.

In the first quarter, a lot of data out there about increased tax refunds and other government stimuli.

Can you give us a sense for especially the dd's business?

Do you feel like that gave you some abnormal benefit in the quarter that you may not be trying to plan for for the rest of the year?

It is hard for us to tell if we got any specific benefit out of it.

So it is not affecting how we plan.

Great, thank you, good luck.

(Operator Instructions).

Dana Telsey, Telsey Advisory Group.

Good morning, everyone.

Can you talk a little bit about marketing, what is new or different there in the investment spend that's going on?

And then also do you think about your inventory packaway versus at-once buys?

Is it different at dd's versus Ross and what the impact on the margin would be?

Thank you.

On the first question on marketing, Dana, there is nothing dramatically changed in terms of our marketing (inaudible), as you know (inaudible) come in and we have great bargains.

In terms of growth of marketing, each year as we add stores, we take up our marketing proportionately.

And every year, that marketing is disproportionately in the back half of the year.

So it's the same pattern this year.

In terms of packaway and how we view packaway, I think that was the question at dd's versus Ross.

We view it exactly the same.

We pack away the best bargains that we can find.

If there are plenty there, we will use packaway -- we will use packaway dollars for it.

If in fact it is a lean period of time, we will carry less.

So it is the same methodology.

Dave Weiner, Deutsche Bank.

Thanks and good morning to all.

A number of my questions have been asked, so I will just ask two quick ones here.

On your long-term earnings growth plan, I think in the past you have given 10% to 15% kind of on average over time driven by a two to three comp.

My first question is does that plan still hold?

And then secondly, long-term store potential still 500 -- you said 500, 500 plus with dd's.

Does that still hold as well?

Sure, on the long-term model, the model still holds.

Our perspective hasn't changed around that and relative to your second question on dd's, we still believe the store potential is around 500 for dd's.

There are no further questions at this time.

I will turn the call back over to management for any closing remarks.

Thank you all for attending.

Have a good day.

This completes today's conference call.

You may now disconnect.