羅斯百貨 (ROST) 2010 Q2 法說會逐字稿

Good morning.

Welcome to the Ross Stores second quarter 2010 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).

I would also like to remind everyone that this call is being recorded.

Thank you.

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

Balmuth.

Please go ahead, sir.

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 second-quarter performance followed by our outlook for the remainder of the year.

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

Before we begin, 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 forecasts of aspects of the Company's future business.

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

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

Turning to our results.

Today we reported second-quarter earnings per share of $1.07 up from $0.82 per share for the 2009 second quarter.

These results represent a 30% increase on top of 52% growth in the prior year.

Net earnings for the current year quarter grew 25% to a record $129.3 million, up from $103.4 million in the prior year period.

Our 2010 second quarter sales increased 8% to $1.912 billion with comparable store sales up 4% which was at the high end of our forecast.

For the six months ended July 31, 2010, earnings per share were $2.24, up from $1.55 in the first half of 2009.

These results represent a 45% increase on top of a 37% gain in earnings per share during the first half of 2009.

Net earnings for the first six months rose 39% to a record $271.6 million, up from $194.8 million last year.

Sales for the first six months of 2010 increased 11% to $3.847 billion with comparable store sales up 7%.

Unlike the many other retailers who reported negative same-store sales in the first half of 2009, our growth for both the second quarter and the first six months of 2010 was on top of a solid 3% gain for both periods last year.

We believe our results continue to benefit from the efficient execution of our off-price strategies combined with our favorable position as a value retailer in this difficult macroeconomic and retail environment.

Home, dresses and shoes were the top performing merchandise categories for both the second quarter and the first six months.

Same store sales for all three businesses were up in the high single to low double-digit percentage range during the quarter.

Geographic trends were relatively broad-based.

Florida was the strongest region for the quarter and year-to-date period with high single-digit and low double-digit comparable store sales gains respectively.

California trailed the chain with second-quarter same store sales that were flat on top of a 3% increase in the prior year.

For the first six months, California comparable store sales were up 3% on top of a 3% gain in 2009.

Clearly the macroeconomic environment in California remains a very difficult with among other issues higher than average unemployment and ongoing weakness in housing.

That said, we believe that the widespread recognition of the Ross brand in our most mature region as well as our consistent focus on value are enabling us to navigate through this climate better than most other retailers.

Our average store sales volumes in the state are among the highest in the chain.

More importantly, our successful inventory management and improved allocation through micro-merchandising have enabled us to show solid growth in average store profitability in California for both the second quarter and the first six months of the year.

For our second quarter, we are pleased to report that the Company's operating margin grew about 140 basis points to 11.1% on top of a 260 basis point improvement in the same period last year.

These profitability gains were driven by a 110 basis point increase in gross margin and a 30 basis decline in selling, general and administrative costs as a percent of sales.

Key drivers of our stronger profit margins for both the second quarter and year to date periods were higher merchandise gross margin, a timing shift in distribution expenses related to packaway level, lower shortage costs and leverage on other operating expenses.

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

As we ended the second quarter, total consolidated inventories were down 1% with average selling store inventory down about 9%.

Packaway was about 37% of total inventories compared to 36% at this time last year.

We continue to plan further reductions of in-store inventories for the back half of 2010 with average levels targeted down in the high single-digit percentage range compared to 2009.

Our ongoing focus on tight inventory management allows us to maximize the percentage of fresh receipts the customers sees when she shops our stores driving faster inventory turns and higher merchandise gross margin.

Turning to our store expansion program, we added a net 26 Ross and five dd's DISCOUNTS stores in the first half of the year and remain on track to open a total of about 35 Ross and 15 dd's DISCOUNTS locations in 2010.

Sales growth rate [trends] at dd's DISCOUNTS also slowed in the second quarter due in part to very difficult prior year comparisons.

In addition, dd's has a large exposure to California with about two-thirds of its stores in the state.

That said, based on our first-half 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 expense.

Now let's talk about our financial condition.

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

We ended the quarter with $775 million of cash and short-term investments.

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

During the second quarter and first six months of 2010, we repurchased 1.8 million and 3.6 million shares of common stock respectively for an aggregate purchase price of $193 million year to date.

We remain on track to complete during 2010 approximately $375 million of our current two-year $750 million stock repurchase program.

I'd like to turn now to our updated outlook for the second half of the year.

As we noted in today's press release, predicting the future in today's uncertain macroeconomic and retail climate remains challenging.

We also face extremely tough comparisons in the second half of the year as same store sales grew 9% and earnings per share rose 67% in the back half of 2009.

As a result while we hope to do better, we believe it is prudent to maintain a somewhat cautious outlook concerning our sales and earnings targets for the second half of 2010.

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

Thank you.

Our 4% comparable store sales gain in the second quarter was driven by a combination of low single-digit increases in both the number of transactions and in the size of the average basket.

Again, operating margin improved by about 140 basis points in the quarter to 11.1% driven by a 110 basis point increase in gross margin and a 30 basis point decline in selling, general and administrative costs as a percent of sales.

Merchandise margin increased about 80 basis points which includes our shortage accrual that was about 25 basis points lower than the prior year.

Distribution expenses declined about 40 basis points.

The second quarter benefited from certain distribution costs related to our packaway balances that are moving into the second half of 2010.

We expect these expenses which are equivalent to a about $0.05 in earnings per share to be incurred in the third and fourth quarters and be neutral for the full year.

Occupancy expense benefited the quarter by about 20 basis points.

These favorable comparisons were partially offset by a 20 basis point increase in freight costs and a 10 basis point increase in buying and incentive expenses.

The decline in selling, general and administrative costs as a percent of sales was mainly due to leverage on corporate expenses from the 4% increase in same store sales.

Our buyback program drove a 4% reduction in diluted shares outstanding and a slightly lower tax rate added about 1% net earnings growth in the quarter.

Turning now to our guidance for the second half of the year.

Again for the reasons Michael just mentioned, we believe it is prudent in this environment to stay somewhat cautious as we plan our business for the third and fourth quarters.

For the 13 weeks ending October 30, 2010, we forecast a comparable store sales gain of 1% to 2% on top of the very strong 8% growth in last year's third quarter.

Earnings per share are projected to be $0.79 to $0.83 compared to $0.84 in the prior year period when earnings per share almost doubled with a 91% increase.

As a reminder, last year's third quarter included a $0.09 per share benefit for much better than expected shortage results.

Our third-quarter 2010 targets are based on the following assumptions.

Sales are expected to grow about 5% to 6% driven by a combination of new store growth and as mentioned, same store sales that are up 1% to 2%.

We are forecasting about 20 net new stores to open during the period including 10 Ross Dress for Less and 10 dd's DISCOUNTS.

We are planning comparable store sales to increase 3% to 4% for August, 1% to 2% for September and to be flat to up 1% for October.

Last year's same store sales drove 6%, 8% and 9% in August, September and October respectively.

Operating margin for the third quarter is expected to be 8.5% to 8.8%.

This compares to 9.9% in the 2009 third quarter which included an approximate 100 basis point benefit from last year's very favorable shortage results.

As is our practice, our third-quarter guidance does not assume any benefit to earnings that may occur if shortage is lower than our accrual.

While we have put in place numerous shortage control initiatives over the past few years that have been successful in reducing shrink, we need to complete our annual physical inventory in September to determine our actual shortage for the current year.

Net interest expense is planned to be approximately $2 million and our tax rate is expected to be about 38%.

We also estimate weighted average diluted shares outstanding of about 119 million.

For the fourth quarter ending January 29, 2011, same store sales are projected to be flat to down 1% compared to an exceptional 10% increase in last year's fourth quarter.

Earnings per share for the fourth quarter are forecast to be in the range of $1.15 to $1.20.

This compares to the $1.16 for the prior year which was up 52% over the same period in 2008.

Given our first half performance and projections for the third and fourth quarters, we are now estimating earnings per share for the fiscal year ending January 29, 2011 to be in the range of $4.18 to $4.27 compared to $3.54 for the 2009 fiscal year.

This represents projected growth of 18% to 21% on top of a 52% gain in fiscal 2009.

Now I will turn the call back to Michael.

Thank you, John.

To sum up, we are pleased with our solid second-quarter earnings growth and the outstanding results we achieved in the first six months of 2010.

Our profit growth for both periods is especially noteworthy considering it was on top of outstanding double-digit percentage gains in the prior year.

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

We remain confident that the formula that has worked so well for us over the past few years, solid execution of our merchandising strategies, along with a continued focus on tight inventory and expense controls will remain the key to maximizing our prospects for sales and earnings growth over the balance of 2010 and beyond.

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

(Operator Instructions) Brian Tunick, JPMorgan.

Thanks.

Congrats and just a couple of questions here.

I guess, first, we look at your merchandise margin compares especially in the back half given what you have done with the inventory improvement and the lead time.

So just curious beyond the back half of this year sort of where you think merchandise margin gains can continue to come from?

The second question on dd's.

Do we assume then the comps turned negative at that concept and sort of where does the square footage growth rate plans next year lie right now given how many leases we may have done?

On your first question, Brian, regarding the margin compares, we still believe there is some room in margin.

We are aggressively managing inventories in the back half.

So our guidance does contemplate some improvement in margin.

However in the back half, that improved margin will be offset by delevering of expenses based on the lower comp rates.

And then Brian, on your question about dd's.

dd's actually is still ahead for the year, year to date, they did slow down slightly in the second quarter.

But I would say dd's was up against pretty strong comparisons from last year.

So there was one final bit of your question.

Could you just repeat what it was?

Yes, where are you guys on your store leads signings for next year?

How many dd's are you guys contemplating when you think about your overall square footage growth rate for next year?

For the Company overall, we expect around about 7% unit growth next year.

Dd's would probably be about one to two points of that.

So maybe 15-ish kind of stores.

Something in that order.

Mr.

Tunick, did you have anything else to add?

No.

We are all set.

Thank you very much.

Laura Champine, Cowen & Company.

Good morning.

It looks like -- first of all let me clarify that was about 7% unit growth next year.

Is that what you had mentioned, Mike?

Yes, Laura, for planning purposes I would say around about that.

I think we've said in the past our unit growth over the next few years will be in the order of 6% to 7%.

Hey, Laura, this is John.

We will get final on those numbers January timeframe -- we will come out with our guidance for the next year but I think, Michael, just in order of magnitude, that is what we are looking at.

Okay.

And it does seem like if I heard your EBIT guidance for Q3 right that you will have a deceleration in the margins that is fairly significant of 8.8 was the high end of that.

And that SG&A expense dollar growth likely grows or increases sequentially.

What is driving that increase in SG&A expense dollar growth year on year in Q3?

So, Laura, the real factor in the third quarter is there was 100 basis point benefit last year received from the shrink benefits.

We haven't dialed any benefit in from this year's shrink so we are up against that 100 basis point.

If you subtract that from the 9.9 that we did last year, you get about right in the -- the high end approaches that level.

So SG&A increases slightly but not that meaningfully.

Okay, thank you.

Stacy Pak, SP Research.

Hi, guys, congratulations.

We've got several questions.

On the industry, are you beginning to see some inventory cancellations?

And are you thinking that the larger in transits that are out there could lead to more cancellations that might benefit you?

What are you seeing in the pricing environment?

You guys made some comments in July about the competitive environment.

I am noticing your August guidance is an up tick in trend from July.

So kind of curious there.

And then finally on California, have you noticed something sort of more in the last couple of months, more of a slowdown?

And are you noticing anything different between northern and southern?

Thanks.

On the inventory cancellations, I would say we've seen an uptick in cancellations that whether it relates to the freight disruption or not, it is hard to tell or just the fact that business has been a little more erratic across Main Street retailing on a monthly basis.

So, but there has been an uptick and also any disruption in flow, which I think is what you are alluding to with the shipping situation is -- any disruption of flow is usually a positive for the off-price community.

What we have seen in pricing is certainly in the second quarter was an extremely promotional.

And obviously our guidance has been cautious because we don't know if that is going to continue or not through the rest of the year.

But we have to be conservative and hopefully we will do better.

But pricing has been -- pricing has been interesting in the department store sector over the last several months.

And then, Stacy, I think your last question was about California.

In all of the regions that we are in, we break down performance by market.

And there are some markets in California that are doing better than others.

But I think overall, the performance in California is kind of how we described it in Michael's remarks.

I wouldn't pick apart any individual market.

Okay.

And then just on the August guidance.

Is any of this -- does it have to do with better pricing from department stores or why are you seeing an uptick in your run rate in August?

So, Stacy, we really don't comment on sales mid month.

We did say coming out of July we saw the turn increase slightly.

We'll leave it at that.

Thank you.

Evren Kopelman, Wells Fargo.

Thank you.

Good morning.

Two questions.

One is on your longer-term EPS growth goals.

I believe historically and correct me if I am wrong maybe it was in the low double digits.

With the significant improvement in your merchandise margins, is there any change to that goal longer term?

And then the second question is with your packaway, how do you think about that in kind of this rising cost environment.

Is that a benefit for you?

Do you think about buying more even more ahead of time to kind of -- ahead of all the cost increases?

How do you think about that?

Thank you.

Evren, this is John.

On your first question relative to our long-term EPS targets, what we have targeted is 10% to 14%, 15% long-term.

The improvement in merchandise margin really haven't affected that that much.

That goal is really a function of topline growth, a comp assumption, some EBIT improvement assumptions and a stock repurchase.

So that really hasn't -- that perspective hasn't changed.

And how we think about packaway, in any environment, we think about packaway as a quality of each buy and the value of -- that we think we can purchase it at and how that fits into our expectations for our assortments for the following season.

And so packaway is purely, purely -- regardless of the economic situation -- quality of each individual buy.

Okay, great.

So you are not increasing earlier buys to kind of ahead of potential cost increases?

If the buy looks appropriate, the answer would be yes.

If it doesn't look appropriate, the answer would be no.

So we don't take a strategy, we don't really have a strategy that there might be cost increases and we are going to buy more packaway.

Again, our packaway levels are a result of the quality of inventory we are able to purchase in the marketplace.

Great, thank you.

Adrianne Shapira, Goldman Sachs.

Thank you.

When you think about comps, we've obviously been seeing traffic be a big driver of comps.

One reason it looks like it is more split between traffic and ticket driving comps.

So going forward, help us reconcile if the department stores seem as if they're a bit more promotional, how we should think about the ticket opportunity especially if you lap some easy year-ago comparisons there?

So, on the ticket comparison, as you said, we were up slightly in the quarter, traffic was up slightly.

And it probably speaks to our pricing where we believe that we are delivering pretty good values.

We're confident about how we're going in the third quarter.

So if department stores decide to get promotional, that might hurt on the traffic a bit like we saw in the spring time.

But we do believe we are pretty well set for the third quarter.

Okay, and can you kind of walk in terms of the traffic trends, have you seen even some -- maybe talk us through sort of the traffic trends you saw in the quarter and how you expect that to play out in the third quarter?

So the traffic trends really were reflected in the comp which was a pretty good guide to the traffic trends.

So if you take our comp assumptions for the third quarter, there is a lot of uniformity in that versus traffic.

Thank you.

And then as it relates to the categories, we have been hearing dresses, shoes, has been a strong driver for some time.

Could you give us some sense in terms of are you seeing some opportunities in other categories or pretty consistent with what has been strong so far?

I think it's pretty consistent.

The big swing is that it has been a very good buying opportunity.

So we will see how that plays out across all the other categories.

But those three businesses have been uniquely strong for us for a period of time, dresses, shoes and home.

Thank you.

Dave Weiner, Deutsche Bank.

Great, thanks.

Good morning.

So a few of my questions have already been asked but I guess I will ask about your growth into new markets next year.

So within that 7% square footage growth that you called out, can you give a little details as to how much of that is in new markets and has there been any change over the last quarter or so in terms of the pace at which you will roll out in those markets?

Thanks.

Dave, I think we've stated in the past that we will enter new markets in 2011.

And I think the important thing to keep in mind at least for the next few years, you know we are talking about the number of stores won't be material in terms of the overall impact on Company growth.

Of that 7% unit growth, it would be no more than a point or two that would be in new markets.

So the financial impact on the Company over the next few years won't be that significant.

Okay.

Any -- thanks -- any comments on kind of geographies?

Like it would be starting in the Midwest and move your way east or --?

We are looking at all of that now.

Obviously we are only in 27 states so there's quite a lot of opportunity for us.

So we are going through the first steps of evaluating the right rollout there.

Okay, thank you.

Sean Naughton, Piper Jaffray.

Hi, thanks.

You talked about the slowdown in comps at dd's obviously up against some difficult comparisons.

But can you talk about any of -- any impact that you saw when the extended unemployment benefits wore off at the and of June and was there a snap back in the comp when those were reinstituted in July?

Obviously the slowdown that we referred to was in the second quarter and the event you just referenced was in the second quarter.

So -- but it has been very hard for us to draw a causal relationship.

And I think the unemployment benefits have only just been reinstituted so it is hard for us to tell if that will have an impact.

So we really don't know.

It could be one of a number of factors that may have contributed to the dd's performance.

Okay, so it doesn't seem like that was -- there was a fall off when those kind of -- when rolled off.

That is not what you guys saw necessarily in the [content]?

We just can't draw a link between the two.

Dd's did see a slowdown in the second quarter as we said but we don't know what drove that [event].

Okay.

And then gross margins.

Obviously you guys are doing a great job in keeping the inventories tight and executing positive same store sales.

But can you talk about -- and you mentioned this that California was improving from the micro-merchandising initiatives.

But have you been able to drill down any further on what the potential is for further merchandise margin expansions or how much has been contributed to this particular initiative?

It's very hard to tell because micro-merchandising was launched about a year ago.

And we are pretty happy with how it is working and obviously over the course of the past year, we have seen pretty significant improvements in our margins.

But there have been a number of things that have contributed to that, the lower inventory levels, the fact that our sales are continuing to run ahead of plan.

So it is hard for us to isolate this particular variable.

We think it is helping but it is hard for us to calibrate exactly how much.

Okay, fair enough.

And then lastly on Florida.

Clearly this has been called out as an area of strength for you guys recently.

Is there anything that you can talk about as to why this particular area or this part of the chain is really outperforming.

Is there a category or have you changed your marketing strategy in this area or are these just coming off some relatively easier comparisons and they are just getting a little bit more of a lift?

Thank you.

I think it is the latter.

I don't think we have reinvented the wheel there.

I think we are up against a couple of soft years and we are getting some share back.

Fair enough, thanks.

David Mann, Johnson Rice.

Thank you.

Going back to the question about your August guidance.

You talked about how it is a little I guess easier compare against last year but it looks like it is a little tougher when you go back two or three years.

I am just curious what your thoughts on that in terms of why you are more bullish on August?

David, this is John.

It's closer and obviously we can see where we are.

As I mentioned, we came out of July strongly so we like where we are in August and given the compares you talked about, that gives us -- that informed our guidance relative to August.

Yes, the other point is back to school obviously is an important time for the customer.

It is a time they need to go out and shop.

So if I was to entrance that with July, which is a much quieter time, there is not a lot of reasons for the customer to go out there unless there are better deals and if there is clearance.

Therefore, we feel like August is an opportunity.

John, in terms of SG&A, can you just give a sense on how you think about the back half in terms of the comp leverage point for SG&A?

Sure.

I did mention we will experience a slight deleveraging in SG&A in the back half on the 1 to 2 in the third and flat to down 1 in the fourth quarter.

So our leverage point now, David, is probably -- we think it is right around 2%, 3% for SG&A.

Okay, great.

Thank you.

Marni Shapiro, Retail Tracker.

Hey, guys, congratulations and good luck with the upcoming fall season.

I was wondering if you guys could just talk about -- you have a lot of moving parts in store, a lot of different segments besides for just women's apparel.

Can you talk about any segments that may be surprised you to the positive or negative that you can chase into the fall and holiday season?

Could you repeat that, it broke up a little.

I'm sorry.

I was curious if there were any segments -- you have a lot of different segments between kid's, non-apparel, misses, juniors, men's, shoes, any segment that surprised you to the positive or negative that you can chase into the fall or holiday season?

Well, I think there is segments within apparel, okay.

Certainly both in juniors and young men's that we could chase.

And we are very happy with our center core business and it's chasing potential there.

Excellent.

Glad to hear that.

Good luck, guys.

(Operator Instructions).

Richard Jaffe, Stifel Nicolaus.

Thanks very much.

You guys have shown really good operating discipline in regards to your inventory last several years.

And wondering at what point, with a year of micro-merchandising under your belt, does that kind of run out of steam and you start operating with rather than declining inventories year-over-year, but start to see that flatten?

And I guess if you want to comment on the next couple of quarters that would be great or if you want to just comment more generally about how you see that unfolding?

You know, basically our inventory, we feel good about how we've been managing it.

I appreciate your kind comments but our view is that we have put things in place with micro-merchandising and so we can plan better on a more localized level, gives us another tool to keep digging in on inventory that we don't need.

So I think there is still room to go and when there isn't, I don't see us plowing in a lot more inventory.

I think we've learned a lot over the last few years that we will be applying forever in this Company.

I didn't mean to imply that it was time to start building inventories, just wondering how much more opportunity -- obviously the big gains have been made in terms of inventory reduction and just wondering if there is still more opportunity?

And it sounds like the answer is yes.

We think there is.

We think there is still more opportunity.

In the back half, we think inventories will be down high singles.

I'm sorry, high singles?

Yes.

Okay, thank you.

There are no further questions at this time.

I turn the call back over to our presenters.

All right, we want to thank you all for your interest in Ross.

We look forward to speaking to you all again in November.

Have a great day.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.