羅斯百貨 (ROST) 2011 Q1 法說會逐字稿

Good morning and welcome to the Ross Stores first-quarter 2011 earnings release conference call.

The call will begin with prepared comments by management, followed by a question-and-answer session.

All lines have been placed on mute to prevent any background noise.

(Operator Instructions).

Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results including sales and earnings forecasts and other matters that are based on the Company's current forecast of aspects of its future business.

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

Risk factors are included in today's press release and the Company's fiscal 2010 Form 10-K and 2011 Form 8-Ks on file with the SEC.

Now I would like to turn the call over to Michael Balmuth, Vice Chairman and Chief Executive Officer.

Good morning.

Thank you for joining us today.

Also on our call our Norman Ferber, Chairman of the Board; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President of 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 and fiscal year.

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

Today we reported a first quarter earnings per share of $1.48, up from $1.16 per share for the 2010 first quarter.

These results represent a robust 28% increase on top of an exceptional 61% gain in the prior year.

Net earnings for the current year quarter grew 22% to $173 million up from $142.3 million last year.

Our 2011 first quarter sales increased 7% to $2.075 billion with comparable store sales up 3% on top of an outstanding 10% gain in the prior year.

Both sales and earnings in the first quarter were better than expected, with solid gains on top of very tough prior-year comparisons.

These results were mainly driven by our ongoing ability to deliver a wide array of compelling name brand bargains to today's value-focused customers while operating our business on leaner in-store inventories.

Dresses, shoes, and home were the top-performing merchandise categories, with same-store sales gains in the mid-single to low double-digit percentage range while Florida and Texas were the strongest regions, also posting high single to low double-digit increases in comparable store sales.

Operating margin grew about 160 basis points to a record 13.7% due to a 130 basis point increase in gross margin and a 30 basis point improvement in selling, general, and administrative costs as a percent of sales.

John will provide some additional details in a few minutes.

As we ended the first quarter, total consolidated inventories were up 29%.

This increase was driven by higher packaway that was about 48% of total inventories, up from 33% at this time last year as our buyers continue to find great deals in the marketplace.

Packaway as a percent of total inventory is somewhat higher today than in the past due to the significant reduction in selling store inventories.

Packaway however as a percent of sales, is similar to average levels over the past five years.

Average selling store inventories were down about 8% at quarter end versus the prior year.

We are still targeting in-store inventories to decline in the mid single-digit percentage range over the balance of the year compared to 2010.

Let's turn now to our store expansion program.

We are excited about our growth plans for 2011, which include our first major new market entry since we entered the Southeast almost a decade ago.

We remain on track to open a total of about 60 Ross and 20 dd's DISCOUNTS locations for the full year including as previously reported, our initial entry into Illinois and Arkansas with about 15 stores in the fall of this year.

I am pleased to report that dd's DISCOUNTS also achieved above plan sales and gross margin in the first quarter.

Like Ross, dd's continues to benefit from our ability to flow a larger percentage of fresh product to our stores by operating on a lower inventory levels.

The ongoing solid gains in sales and profitability at dd's also reflect that its value-focused merchandise offerings are resonating well with its customers.

Based on our first-quarter results and outlook for the balance of the year, we continue to expect dd's DISCOUNTS to generate solid growth in its pretax earnings for 2011.

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

Thank you.

Our 3% comp store sales gain in the first quarter was driven by a low single-digit growth in both the number of transactions and the size of the average basket.

Again, operating margin improved by about 160 basis points in the quarter to 13.7%, driven by a 130 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 95 basis points mainly due to lower than planned markdowns resulting from above plan sales and faster turns.

The merchandise market improvement also includes a 15 basis point benefit from a somewhat lower shortage accrual compared to last year.

Occupancy and distribution costs were also lower than expected, contributing about 25 and 20 basis points respectively to operating margins.

Partially offsetting these improvements was a 25 basis point increase in freight costs mainly due to higher fuel prices.

The 30 basis point decline in selling, general, and administrative costs as a percent of sales was due about equally to a combination of leverage, on store operating costs, and general and administrative expenses.

Our tax rate remained unchanged from last year's first quarter while our buyback program drove a 5% decline in diluted shares outstanding for the period.

During the quarter, we repurchased 1.6 million shares of common stock for an aggregate purchase price of $112 million.

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

Earlier this year, we announced a two-year $900 million stock repurchase program for 2011 and 2012 and raised our cash dividend by 38%.

We remain on track to complete approximately $450 million or about half of our current authorization by the end of 2011.

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

For the 13 weeks ending July 30, 2011, we are forecasting same-store sales to increase 2% to 3% on top of a 4% gain in the prior year.

Second-quarter 2011 earnings per share are forecasted to be in the range of $1.15 to $1.20.

This represents projected EPS growth of 7% to 12% on top of 30% and 52% gains in the second quarters of 2010 and 2009 respectively.

Our second-quarter 2011 EPS targets are based on the following assumptions.

Total sales are expected to grow about 6% to 7%, driven by a combination of new store growth and as mentioned, same-store sales that are targeted to be up 2% to 3%.

We are forecasting about 23 net new stores to open during the period including 15 Ross Dress for Less and eight dd's DISCOUNTS.

We are planning comparable store sales gains of 2% to 3% for each month of the quarter.

Last year's same-store sales rose 5% in May and June and 2% in July.

We are projecting operating margins of 10.8% to 11% for the 2011 second quarter.

This compares to 11.1% in the second quarter of 2010, which was up 140 basis points on top of an outstanding 260 basis point increase in 2009.

There are a number of reasons why we are planning operating margins to be slightly down in the second quarter compared to a much better than planned 160 basis point growth in the first quarter.

Though we are still projecting a slight increase in merchandise margin for the second quarter, this growth is forecasted to be much less than the 95 basis point gain we just reported.

That improvement was mainly driven by sales that were well above plan, resulting in faster turns and much lower markdowns.

In addition, our second-quarter guidance assumes that we start to see some modest pressure on margin from higher sourcing costs.

Distribution expenses as a percent of sales which declined about 20 basis points in the first quarter are forecast to increase in the second quarter.

This is mainly due to timing of packaway-related expenses.

As a reminder, we capitalize buying and distribution costs associated with packaway inventory and recognize those expenses when the merchandise is sold.

Last year, distribution expenses declined by 40 basis points in the second quarter as packaway levels rose.

This year distribution costs are forecast to increase by a similar amount as packaway levels are projected to decline somewhat.

Finally as previously mentioned, occupancy contributed about 25 basis points to operating margins in the first quarter.

This was mainly due to about 20 basis points from occupancy-related savings for certain locations combined with slight leverage on the above-planned sales.

Net interest expense is planned to be approximately $2.5 million and our tax rate is expected to be about 37% to 38%.

We also estimate weighted average diluted shares outstanding of about 116 million.

Now I will turn the call back to Michael.

Thank you, John.

I want to reiterate that we are very pleased with our better-than-expected start to the year.

Especially given the tough prior-year comparisons and the ongoing challenging macroeconomic and retail climate.

It's also important to note that our guidance for the balance of the year takes into consideration some potential external factors that could pressure our business.

These include the ongoing uncertainty in the macroeconomic environment as well as our expectations, as previously mentioned, for higher sourcing costs.

Nevertheless, we remain confident that our flexible business model will help us navigate the environment better than most full-priced retailers.

While we hope to do better based on our recent performance trends, we are now forecasting some incremental upside to our original earnings guidance for the balance of the year.

As noted in today's press release, we have raised our full-year fiscal 2011 earnings per share forecast to $5.16 to $5.31, which is ahead of our initial guidance of $4.90 to $5.10.

This updated earnings per share range represents projected growth of 11% to 15% in fiscal 2011 on top of exceptional 31% and 52% gains in 2010 and 2009 respectively.

As we have said before, we know that our ability to give customers the best bargains possible is and always will be the key to our success.

To ensure that we have ongoing access to a plentiful supply of off-price product, we are making further investments in our merchandise organization.

Continued expansion of our merchant staff reflects that delivering compelling bargains to our customers remains our number one priority and also our most important strategy.

Our recent example of the benefits we are seeing from this investment is the terrific buys we have been able to make on packaway and in-season merchandise that help drive our much better than expected performance in the first quarter.

During the turbulent economic environment of the last couple of years, we have seen customers gravitate more toward off-price retailers.

Looking ahead, we believe that this increased focus on value by consumers will continue, which bodes well for our business.

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

(Operator Instructions) Paul Lejuez, Nomura.

Thanks.

Guys, you obviously have a lot of experience with packaway merchandise.

I am just wondering if you could maybe share with us the typical merchandise margin that you would see on that sort of product relative to non-packaway buys?

And then I'm also wondering what are your markdown levels looking like this year end of first quarter versus last year?

Thanks.

I would say packaway margins in the respective categories of merchandise are slightly higher, but it all depends on balance and how we have purchased it in better versus moderate product.

But like product category to category, it's slightly higher.

The other thing I'd add to that, Paul, is that when we look at the average retail of packaway items, that tends to be a little bit lower, sort of better value.

Packaway tends to turn over a bit faster.

Relative to your question about markdown levels in the first quarter, merchandise margin improved by 95 basis points.

15 of that was due to shortage and substantial -- the most substantial part of the remaining 80 was due to lower markdowns.

How about ending the quarter, John?

What is that?

How about at the end of the first quarter?

What do markdown levels look like relative to last year?

So our clearance levels were down at the end of the first quarter about 15% (inaudible), Paul.

Yes, exactly, thank you.

Brian Tunick, JPMorgan.

Thanks.

Congrats, guys.

As you move into the new states, just curious sort of what are you doing differently marketing or logistic wise as you enter the new markets today versus a couple of years ago to ensure success?

And then the second question on the CapEx or the store buildout cost side, what is sort of happening there as we hear some of the landlords are having some financing issues.

How is that changing the economics for you guys?

Okay, I'll take the first part of that, Brian, in terms of what are we doing in new markets.

I guess I'd say a couple of things.

We have done a number of -- we have pursued a number of initiatives in the last few years across the chain that I think will be particularly helpful in new markets.

First of all, the investments we have made in improved localized planning and trending what we call micro-merchandising, that should be particularly helpful as we move into new markets in terms of making sure we have the right assortment and trending that assortment based upon the local customer needs.

Secondly, the investment for the merchant group that Michael referenced in his comments again, I think will help the new markets as they help the whole chain.

Then the leaner inventories mean that the merchandise will turn faster and we will be able to replenish it more rapidly with merchandise that we think more appropriate for that customer based upon the sales trend.

So there are a number of things that make us feel like we are in better shape now than we were several years ago entering new markets.

The other point that I would make though is I think we learned a lot from expansion into the Southeast in terms of marketing and operations and we are obviously employing some of those learnings as we enter new markets.

And then the final thing, the final point to make is that in our plans, although the new markets are important to us financially, they are not going to be material for at least the next couple of years.

You have the 6% or 7% unit growth that we are forecasting; only 1 to 2 points of that is in the new market so I think it is important to put that in context.

So on the second point of your question, Brian, CapEx related to new stores will be about $110 million this year, up from $76 million last year, driven by a couple factors.

One, we are rolling out stores.

And secondly, the stores will require a little bit more CapEx as we take on more of the ownership of the buildout.

Adrianne Schapira, Goldman Sachs.

Thank you, I am just wondering if you could -- your comments about some modest pressure from sourcing costs, if maybe you could shed some light, quantify what you are seeing in the market today?

I'm sorry, I couldn't hear some of the question.

Could you repeat it please?

I was just asking you to better -- following on your comments about this pressure from sourcing costs if you could just quantify what you're seeing in the marketplace today?

Clearly every manufacturer is discussing and is public -- those that are public companies are discussing the sourcing cost increases from the Far East.

We are seeing it in terms of our dialogue with them and we expect it to really be more impactful as we move to the latter part of the second quarter into the third quarter.

The one thing that isn't clear is how this will all play out.

Typically changes of pricing like this is a disruption in the industry and in the past, it has been good for off price.

So we don't know how this will play out.

This is a very different situation than apparel-based companies have seen for a long, long time seeing inflation in apparel versus deflation.

So we are fortunate that we have a flexible model and can react to how this plays out by business and we can allocate dollars within our stores for businesses in a very simple way.

We operate our business with a lot of liquidity, so we are seeing that manufacturers want to raise their retails, want the retails to be raised in mainstream stores.

We are seeing mainstream retailers try this.

We are not sure how effective or not it is yet, but we have our eyes very much attuned to it and for us, it's more news to follow.

But it has now becomes a way of life for us to monitor even more so than before to monitor everything that's going on in mainstream retailers as it relates to pricing.

Just following up on your comments, two points you raise.

It sounds as if some people have been trying to pass on modest increases early in the year.

I'm wondering if you are sensing any disruptions and have you been opportunistic in light of any disruptions people have had a harder time passing along even the modest levels today?

Second, as you are looking for pressure to mount in the back half, if you could kind of quantify it, what sort of increases are you -- are the manufacturers talking about?

I got the first part of the question.

The second one I will wind up coming back to you on.

The first part of the question in terms of -- we are seeing sizable amounts of product in the marketplace.

I don't know that it's directly attributable to the pricing increases or sales not materializing at certain sectors of retail to the degree that they forecast or if there are other problems inside their four walls.

But it has been a very good buying market as our packaway levels would show.

And I'm sorry, I did miss the second part of the question.

Sure, I was just asking if you could quantify the increases that you are alluding to in the back half, what manufacturers are looking to pass on?

It depends on the category.

Certain categories are minimal.

Certainly cotton-based categories are highest.

In some cases, they are in low double digits.

In other cases, they are in low singles, but it varies everywhere by sector of the store and manufacturer within that.

And how some manufacturers are absorbing more, others are passing on more, so it's -- that's as specific as I can be.

Thank you.

Evren Kopelman, Wells Fargo.

Thank you.

Good morning.

I wanted to ask about the strong regions and the strong categories for Florida and Texas.

What do you think is driving the better results there?

Florida you've been calling out for a while and how sustainable is double-digit comps there?

Same question for the strong categories, is it more space allocation?

Is it something else?

Again, how sustainable are kind of the [dress] issues (inaudible)?

Thank you.

On the regions, Florida and Texas have been our strongest regions.

But I would say that actually across the chain all our regions have been performing reasonably well.

In Florida or Texas, with Florida in particular, the economy in Florida over a number of years was fairly weak and our comps going back to a few years ago were fairly weak.

So we think we are recovering, have recovered quite a lot of it.

I don't have a comment on Texas.

Relative to the strong categories, going into any selling period, we identify where we feel that we have the strongest ammunition in terms of product.

And that ties to both fashion trends as well as product availability that is in our hotel and also what we expect in the marketplace.

And so I would say the categories that are performing best in our store that we referred to in the comments were all of the above.

We think there are fashion trends going on in the apparel base, the apparel parts of that that are very dominant to what's going on and apparel today as well as they were early -- we identified them early and we funded them.

Okay, thank you.

Sean Naughton, Piper Jaffray.

Thanks and congrats on a good first quarter.

In terms of the comp guidance for the second quarter, your two-year trend has been steadily in the low double digits for about the last nine months and your forecast is for a mid to a high single.

Is there anything in terms of the second quarter from last year that we should be thinking about in year-over-year comparisons or anything you are seeing in the business that we should think why that could potentially slow?

The only thing I could point to, Sean, is that the last few years there has been with the economic decline, etc., there has been so many shifts in the economy and in the retail sector that looking back just over two years is a little bit misleading.

If you look back over three years or even four years, I think you will see that the guidance that we have out there -- that we are just putting out there for Q2 is in line with Q1.

But you have to (multiple speakers)

That's fair.

And then in terms of dd's, maybe, Michael, you can talk about some of the sales and gross margins sounded like they were ahead of plan internally.

Can you give us an update on whether or not this division was positive to the operating margin in Q1 and how you are thinking about that business as you roll it out for all of 2011?

So, Sean, for the first quarter, dd's did well and EBIT before allocations was positive.

We are on trend with that business.

The guidance we gave to start the year was that business would be slightly accretive to earnings and we are on pace to do that.

Okay, that's good to hear.

And then maybe just lastly in terms of the SG&A, obviously nice leverage on that 3% comp in Q1.

Should we expect that similar type of leverage throughout the balance of the year if you are able to achieve this level of same-store sales?

There are a couple of unusual factors that affected the margin in Q1 that Michael referenced in his comments, particularly the timing of distribution expenses that we wouldn't expect to recur in the balance of the year.

So we would expect some leverage on 3% comp, yes, but not as much as you saw in Q1.

Great.

Best of luck on your second quarter.

Jeff Black, Citigroup.

I guess my question, I just don't recall seeing inventory 20% above the sales rate even when we had an high levels of packaway.

Back in '04, we were 3s and 4s above the sales rate but not 20%.

So what do we expect to end 2Q, would be the question?

The other part of the question is just on the liquidity dynamic.

As you get into the back half, with these high levels of packaway, will you be able to take advantage of inventory buys should they emerge?

Thanks.

Let me take the first piece, Jeff, about the inventory growth.

I think it is very important to separate out packaway inventory which we are buying to roll out later in the season or even in next season from selling store inventory.

The selling store inventory continues to be reduced and actually will continue to be reduced in the sort of high single digits for the rest of the year.

And that's what's driving our faster turn in our markdowns.

The packaway is much more opportunistic and although it looks high as a percentage of inventory, the truth is that because we have been cutting our inventories, that is actually quite a misleading metric.

If you look at packaway as a percentage of receipts or as a percentage of sales, it's in line with our average over the last five years and actually it's somewhat lower than it was eight to 10 years ago.

So based upon that, we feel like our inventories are in pretty good shape.

And with what Michael just said, we feel very comfortable about our ability to chase the business and be totally liquid for fall.

And that packaway, which is some of the best buys in our store, is not in any way going to be an inhibitor for us to take advantage of market opportunities.

Then to end 2Q, where do we see the just total inventory levels going?

Well, let's piece that out again and we can add them back up, but in-store levels should be down, as Michael mentioned, for the year they should be down mid-single digits.

And packaway levels on a sequential basis, we're planning those to come down slightly in the second quarter.

But still probably higher than last year's levels, yes.

Great, thanks.

Good luck.

Kimberly Greenberger, Morgan Stanley.

Great, thank you.

Michael, the sales growth in the first quarter far exceeded what we expected and I think your plan as well.

I am wondering if you can just talk about the drivers of the upside.

It didn't seem like weather was particularly favorable in Q1.

And is it that the content of the merchandise you were able to buy was just so much better than last year?

If you could just dig down a little bit and shed some light on those drivers, that would be helpful.

What I would say is two aspects.

What we were buying in season was better than we expected and our packaway, which we had accumulated several months prior, performed at a very strong level.

Additionally, we had certain businesses that have been strong for us for a period of time that continued to perform as we expected or as we had hoped at a very high level.

And in those businesses, we found plenty of product as we were going.

And those were the businesses we identified in the comments.

Good luck for second quarter.

Stacy Pak, Barclays Capital.

I guess I have a few questions, but I am wondering if you can just start with the sourcing cost increase in Q2 and increase in the second half.

I guess fundamentally, you are mostly buying excess, right?

So why would you really expect your costs to go up if you are buying what other people don't really want?

I mean, I thought sort of the fundamental thing in off-price was you are not going to be as impacted by the rise in sourcing, just because of that factor.

So could you start with that?

Start with it.

Just a big unknown for all of this, in this for all of us, but essentially manufacturers are going to be paying more.

There is the possibility that even on their excess, we might have to pay a little more than we paid a year ago, and so that has some pressure.

We don't know how our customer would respond to that or if we will pass it on to them.

So it will depend by category, by timing of buy, by vendor, by brand label.

So there's many, many variables.

But at this location like this, in the past it's been positive, but this is such a different dislocation we are a little uncertain to its implication.

Remember there has not been inflation in apparel prices for years and years, so this is a very large unknown.

Right.

You are not paying more yet, are you?

We are not paying more yet would be an appropriate comment on closeouts, but we don't know what's ahead here.

We do not know.

Okay, and then on May will you comment whether you are in line with the 2 to 3?

I'm also wondering if we should use a 30% flow through if there is upside to sales going forward or if we should be using a different flow through to upside on sales going forward?

And then lastly, can you talk about how we should think about shrink or the opportunity in shrink going into the back half of the year?

(technical difficulty) your question -- was flow through and we think about 25%, 30% is appropriate for our model.

The third part of your question was relative to shrink and last year in the third quarter, we picked up about $0.10 relative to our expectations around shrink.

Right now our guidance does not include any benefit that we may get from shrink.

I guess, okay, but do you think you're going to get a benefit on top of the $0.10 benefit from last year, is the real question?

We take physical inventory in September, Stacy.

It's hard to predict that.

Certainly over the last years we've made investments to try and reduce shortage (inaudible) so we hope to do well but really very hard to predict.

Okay, and then I didn't hear, did you answer the May?

Yes, the answer was we don't comment on mid-month sales.

I'm sure that is not the answer you wanted, but that's our policy.

Okay, then just last thing, if I may.

Are you seeing any different product at dd's given what happened with A.J.

Wright, any product availability?

Some, some.

Okay, thank you.

Jeff Stein, Soleil Securities.

Good morning, gentlemen.

A question regarding the behavior of the dd's customer relative to the Ross customer given the recent rise in gas prices.

I am wondering now that you have kind of crossed that $4 a gallon threshold, are you noticing the dd's customer behaving any differently?

Jeff, I'll take that.

I think the answer -- the short answer is no.

dd's beat its internal sales plan in the first quarter, as it did last year, so we are very sensitive to things like gas prices and the general economy but we really haven't seen any pullback from dd's customer.

I should also comment we looked at Ross's business by income bands as well based upon where the stores are and what the income demographics are for the stores.

And across income bands, Ross's performance has been fairly consistent at the low-end and at the high-end, so we haven't seen any impact on from gas prices.

Two other quickies.

First of all, what was the --?

How many dd's stores were there at the end of the first quarter?

The number is 70, Jeff.

Okay, and then one question on packaway.

Is there -- I guess did you make -- it's the huge jump that you had seen in packaway, is it across multiple categories or is there perhaps one large or one or two large purchases that you made that you are just going to parse out over a period of time, maybe three months, six months?

It's pretty broad-based.

There are a few pockets where we are a little more invested, but I just want to remind you that packaway is some of the best product in our store and we are happy when our packaway level moves up.

I understand that.

I guess -- the reason for my question is this.

Let's say hypothetically you made a great buy in Hanes underwear and you put 30% of it out in the first quarter and it sold great.

And then you put another 30% out in the second quarter.

That could boost your sales as well.

So I'm trying to understand, have you seen positive indications on a piece of that packaway that give you reason to be optimistic for subsequent quarters in sellthrough?

It's broad-based.

It's not one -- a few big buys, a few big buys in certain pockets, and I think that's the most -- I think that's the answer I would give you, unless I'm missing part of the question.

That's it.

Thanks.

Laura Champine, Cowen and Company.

Good morning.

I wanted to talk a little bit about the new markets.

You referenced that this is really the first expansion into new territories in nearly a decade.

Does that imply higher unit growth for next year or how should we be modeling unit growth beyond 2011?

Laura, I would say you should assume it would be similar to 2011, so about a 6% to 7% unit growth.

We feel like -- we feel like we can manage growth in a fairly high-quality way at that kind of level.

So although certainly long-term there are big opportunities we think it's better to stick with sort of a 6% to 7% unit growth per year.

Okay, thank you.

Roxanne Meyer, UBS.

Good morning and congratulations on a strong first quarter.

I was just curious, you raised guidance or it's implied that you raised guidance since you've given your April comps to the tune of about $0.06 for the rest of the year.

I'm just wondering what specific areas you are feeling more confident in as we look out for the rest of the year?

And then secondly, how should we think about freight costs increases as we move forward?

Thank you.

Relative to the year, you're right, Roxanne, we did raise it a bit.

We just tightened things up a bit, so that guidance assumes that EBIT will increase about 20 to 40 basis points over where we had it initially.

So I think it just overall looking at it and tightening a few things up.

Relative to freight costs, freights was up in the first quarter principally driven by fuel costs and our outlook right now is the Department of Energy is forecasting those freight and fuel costs to remain fairly flat to where they are.

That is implied in the guidance and we will just have to see where freight goes.

The other point I would make, freight costs have 2% to 3% sales for us and fuel is just a component of that.

So as John said, we've sort of -- we've built in projections in our guidance but it's not I would say a vulnerability for us at least on the cost side.

Marni Schapiro, The Retail Tracker.

Congratulations on a great quarter.

You know, we have a lot of conversation about the environment being uncertain not just because of average unit costs going up but also the consumer and you guys have done a very good job of being very nimble.

Could you talk a little bit around how close to [these] can you be buying these days and how much flexibility you have if you see pricing change to really manipulate what's going on in season?

We have a lot of flexibility and we can adjust prices within a 30-day period.

We can have our store in most categories at different price [lines].

So we watch what's going on very closely.

Buyers are constantly out in mainstream retailers and we are in constant touch with the market and the combination of all of that will lead us to be very aware and very quick to adjust prices if we need to in any direction.

(multiple speakers) The other point that I think Michael made earlier is that the flexibility also allows us to move between businesses in terms of if we think there are better values in one business versus another, we can shift dollars between those businesses as well.

That sort of answers what my follow-up was.

Thanks, guys.

Good luck.

Mark Montagna, Avondale Partners.

Just wanted to ask a question about the fourth quarter ending inventory where you had a lot of packaway.

I know I hate to beat a dead horse but it sounds like it was a very good buy.

It sounds like you've gotten from the margins that you had expected.

I am wondering if you could just characterize did that buy exceed your expectations in terms of the sellthrough and the margins?

And as you replace the packaway, do you expect to replace it at the same margin that you had actually put some in?

Let me respond to that, Mark.

I think -- I go back to what we said earlier, that packaway is among the most attractive stuff in the store but to the extent that we buy more packaway, we think that's a good thing for our business.

Having said all that, the truth is that if you look at our packaway balance and you look at our sales for the year, packaway is close to a tenth of our sales.

So there's a limit to just how important packaway is.

So did it help in the first quarter?

Absolutely, but did other merchandise do pretty well?

Yes, it did, so it wasn't just the packaway [for us].

Okay, thank you.

Richard Jaffe, Stifel Nicolaus.

Thanks very much.

And again, the dead horse, packaway.

How long does merchandise stay in packaway, stay in your warehouse before you flow it out on average?

Is it a seasonal thing or just a week-to-week, month-to-month kind of flow?

It's a seasonal thing.

On average packaway's flow right now -- the holding period is about three months, so that's about where we are.

No, that's great.

On a different subject, product costs appear to be going up industrywide.

Where are your average unit retails today for the two divisions?

How do you see them changing if at all in the second half?

So the average unit retails at Ross have been pretty consistent around $10 and dd's is probably between $7 and $8.

That's where we are today and we will just have to see where they go.

If the world trades up 10% with product costs up about the same amount, could you imagine yourself doing the same thing or would you try and just offer greater value?

The key thing for us is to keep a value differential between us -- between our product and mainstream retailers, and it's something we're watching very closely, so we are going to react and move with what our customer tells us, and what the market has to bear in this.

Great, thanks very much.

Jill Caruthers, Johnson Rice.

Thank you, it's David Mann.

Congratulations.

My question goes back to packaway again.

In terms of the second-quarter guidance for the expense that you are going to take out of inventory, what packaway level -- I'm not sure if you said what packaway level do you expect it to go to and will you be recognizing all of the expense that you -- the entire expense that's sitting in inventory?

David, packaway levels we have them plan -- down slightly but still exceeding last year, so a piece of the deferred costs will come through but not all of the costs.

And then how much additional costs might there be that we'll need to take into account for third and fourth quarter?

It all depends on where packaway levels go, so we will have to see where that goes.

I guess if we assume that they went back to historical levels, how much additional cost distribution cost is sitting in inventory?

You know, David, that's a more difficult question to answer.

To go the other way, in the second quarter of last year when packaway levels went up, we deferred about $0.04 or $0.05 on those costs.

So we could get at it that way.

But also be a little bit careful with your historical levels, David, because if you compare with four or five years ago, our packaway levels are at historical levels already.

If you compare with last year, obviously they are higher than last year's.

So is there a chance, in your view, that we may see an extended period where packaway levels are at a higher than -- say, at these heightened levels?

It's very unpredictable.

Frankly we would like if the answer was yes, but it's unpredictable so it's hard to say.

Very good, thank you.

Dana Telsey, Telsey Advisory Group.

Good morning.

As we talk about the changes that have happened just whether it is with inventory and obviously the expense planning that you have done, how do you think about future targets for the business where operating margins can go over the long-term?

And how are you feeling about the potential for dd's and what that store count should look like over the long term?

Thank you.

Let's see, in terms of long-term targets, I think we feel very happy with our long-term goal of 10% to 15% EPS growth.

Now within that, I think the margin level, we think our current margins are sustainable.

Maybe we can squeeze a little bit more out but I think that's (inaudible).

Either way I think we'll end up with 10% to 15% EPS growth.

Secondly on dd's, I think we've said that we think dd's can get to be a 500 store chain.

Just on the operating margin side?

On the operating margin side, Dana, we do believe that we are sustainable at the current levels.

The biggest driver of any improvement in operating margins is typically better than planned sales on the top line, like you saw during first quarter.

So if we can achieve, overachieve our sales targets, we should see some of that drop to the bottom.

Thank you.

Dave Weiner, Deutsche Bank.

Great, thanks.

Good morning.

So a lot of my questions have been asked but I guess I will ask one on pricing.

One of your answers a couple of answers ago you talked about how you are constantly in this field checking competitor pricing.

Have you actually seen for comparable prices competitors -- for comparable merchandise, competitor prices go up yet or maybe over the last month or two?

I know you're talking about kind of what's on the come in the back half of the year but how about over the last couple of months?

We have seen experimentation in mainstream retailers of price increasing.

So is that mostly within apparel, within apparel categories, or does that extend to home as well?

No, that was all in apparel.

All apparel, okay.

So when you say experimentation, it's -- they are trying on kind of very limited SKUs and then we'll see where that takes us in the back half or they are kind of sticking with those price increases?

No, I think what we've seen -- and it varies.

In some cases, we've seen them experiment on the ticket and POS deeper, so it was going out the door at the same price.

In other cases, we've seen people stick with it a little longer.

So it's not clear who is going to do what and when and how.

Got you.

Just one last and this may be kind of minutia, but I will ask it anyway.

If -- on the price increases that you have seen that have kind of have been sustained on those products, is that enough to cover what you think the general cost increases are or even if these price -- current price increases stick, we are still going to be short coming into the second and third quarters of what the cost increases would be?

If I fully have the question, where we saw people experimenting with price, they were experimenting at a retail that was consistent with their expected price increases.

Okay, that answers the question.

Thanks very much.

There are no further questions at this time.

I will turn it back for closing comments.

Thank you for joining us today and for your interest in Ross Stores.

Have a great day.

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

You may now disconnect.