羅斯百貨 (ROST) 2011 Q4 法說會逐字稿

Good morning and welcome to the Ross Stores fourth-quarter and fiscal-year 2012 earnings release conference call.

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

(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, fiscal 2011 Form 10-Qs and fiscal 2011 and 2012 Form 8-Ks on file with the SEC.

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

Good morning.

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

We will begin with a review of our fourth quarter 2011 performance followed by our outlook for 2012.

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

We are very pleased with our robust sales and earnings in the fourth quarter and fiscal year of 2011, especially considering they were achieved on top of strong multi-year gains.

Our healthy revenue growth continues to be driven mainly by our ability to deliver compelling bargains on a wide assortment of exciting name brand fashions for the family and the home to today's increasingly value-focused consumers.

In addition, we continue to operate our business on lower in-store inventories which benefited profit margins by driving faster turns and lower markdowns.

It also enhanced sales by increasing the percentage of fresh merchandise in our stores.

Earnings per share for the 13 weeks ended January 28, 2012 were $0.85, up from $0.69 for the 13 weeks ended January 29, 2011.

These results represent a 23% increase on top of 18% and 53% gains in the fourth quarters of 2010 and 2009, respectively.

Net earnings for the 2011 fourth quarter grew 19% to $192 million.

For the 52 weeks ended January 28, 2012, earnings per share was $2.86, up 24% on top of 31% and 52% gains in fiscal 2010 and 2009.

Net earnings for fiscal 2011 increased 18% to $657.2 million.

Fourth-quarter sales rose 12% to $2.398 billion with comparable store sales up 7% on top of 4% and 10% gains in the fourth quarter of the prior two years.

For the full year total sales grew 9% to $8.608 billion, with same-store sales up 5% on top of 5% and 6% increases in 2010 and 2009, respectively.

Juniors and shoes were the best-performing merchandise categories for the quarter.

For the full year, the strongest businesses were dresses, shoes and juniors.

Geographic trends were broad-based with all regions posting solid same-store sales increases for both the quarter and the year.

Florida was the top region for both periods.

Earnings before interest and taxes for the 2011 fourth quarter grew to 13% of sales, up about 70 basis points on top of 60 and 260 basis point increases in the prior two years.

For fiscal 2011, operating margin rose to a record 12.4%, up 85 basis points on top of 140 and 250 basis point gains in fiscal 2010 and 2009, respectively.

Our improved profit margins for both the quarter and the full year were driven primarily by a combination of higher merchandise gross margin, lower shortage costs, and leverage on operating expenses from the strong gains in same-store sales.

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

As we ended the fourth quarter, total consolidated inventories were up about 4% compared to the prior-year, mainly due to higher packaway levels that were about 49% of total inventories, up from 47% at this time last year.

In-store inventories were down on an average about 7% in 2011 on top of double-digit declines in the prior three years.

Our expansion plans remained on track as we added 49 net new Ross Stores during the year (Company corrected after the conference call).

As previously mentioned on our November earnings call, this growth included our initial entry into the Midwest region in October with the opening of 12 new Ross Dress for Less Stores in the greater Chicago area.

As planned, we also accelerated new store growth at dd's DISCOUNTS in 2011, adding 21 locations and ending the year with 88 stores in seven states.

This business continued to deliver solid sales in 2011 and had significant gains in operating profit compared to 2010 when it realized its first year of positive earnings.

Similar to Ross, dd's has benefited from our ability to deliver a faster flow of fresh and exciting product to our stores, while operating on lower inventory levels.

Now let's talk about our financial condition.

Operating cash flows provided the resources to make capital investments in new store growth and infrastructure, as well as fund our ongoing stock repurchase and dividend programs.

In November we announced a two-for-one stock split.

And more recently, in January 2012, our Board of Directors raised the quarterly cash dividend 27% to $0.14 per share.

This represented the 18th consecutive annual dividend increase since the program was initiated in 1994.

Our recent stock split and ongoing stock repurchase and dividend programs reflect our commitment to enhancing stockholder returns.

They also demonstrate confidence in our continued ability to achieve our growth targets while generating significant amounts of excess cash after self-funding the capital needs of our Business.

Now John will provide further color on our fourth-quarter results and details on our first quarter and fiscal year 2012 guidance.

Thank you, Michael.

Our 7% comparable store sales gain in the fourth quarter was driven by mid 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 grew by about 70 basis points in the quarter to 13%.

Cost of goods sold improved by 5 basis points, benefiting from a 35 basis point increase in merchandise margin, including 15 basis points of lower shrink expense.

Other positive drivers included 35 basis points in lower distribution costs and 30 basis points of leverage on occupancy.

These favorable trends were partially offset by 50 basis points in higher buying costs, mainly due to the timing of incentive expenses versus last year, and 45 basis points of increased freight expense primarily from higher rates and fuel cost versus last year.

Leverage on the strong 7% comparable store sales gain in the quarter drove a 65 basis point reduction in selling, general and administrative costs.

Store operating expenses declined by about 40 basis points, while G&A costs were at 25 basis points lower.

As Michael mentioned, for fiscal 2011, operating margin rose to a record 12.4%, up 85 basis points over the prior year.

Total cost of goods sold improved by 35 basis points mainly due to a 50 basis point gain in merchandise gross margin, which included a 15 basis point benefit from lower shrink and 20 basis points of occupancy leverage.

These favorable gains were partially offset by a slight increases in freight, distribution and buying expenses of 20, 10, and 5 basis points, respectively.

Selling, general and administrative costs for the year improved by 50 basis points as the 5% increase in comparable store sales levered both store and G&A expenses.

Turning to our stock buyback program, during the fourth quarter we repurchased 2.2 million shares for a total purchase price of $107 million.

For the 2011 fiscal year, we repurchased 11.3 million shares for a total price of $450 million, representing half of our two-year $900 million authorization.

We expect to complete, as planned, the remaining $450 million in fiscal year 2012.

We opened 70 net new stores in fiscal 2011, ending the year with 1,037 Ross Dress for Less stores in 29 states.

And, as Michael mentioned, 88 dd's DISCOUNTS in seven states.

Now I'll spend a few moments summarizing the underlying assumptions that support our 2012 EPS targets.

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

Our fiscal year 2012 earnings per share forecast of $3.12 to $3.27 was based on projected sales growth of 7% to 8% for the 53 weeks ending February 2, 2013 compared to the 52 weeks ended January 28, 2012.

This top line growth is forecast to be mainly driven by a 6% to 7% increase in the net number of stores.

And 1% to 2% growth in same-store sales.

Our forecasted store growth for 2012 includes about 60 new or relocated Ross Dress for Less and 20 dd's DISCOUNTS locations.

About one-third of these stores are targeted to open in new markets.

These openings do not reflect our plans to close or relocate about 10 older stores.

Our fiscal 2012 EBIT target is 12.5% to 12.7%, including an approximate 20 basis point benefit from the 53rd week.

This suggests that operating margin on a 52-week basis will be relatively flat to 2012 compared to 2011.

A modest increase in merchandise gross margin driven by a mid single-digit decline in selling store inventories throughout the year is expected to be offset by some slight deleveraging of buying and occupancy costs from the forecasted 1% to 2% gain in same-store sales.

We also expect somewhat lower selling, general and administrative costs as a percent of sales, mainly due to a projected decline in incentive costs compared to last year.

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

Our tax rate is planned to be approximately 38%.

And we expect an approximate 3% to 4% decline in average diluted shares outstanding to about 223 million.

Our first-quarter guidance that we issued at the beginning of February was for same-store sales to be up 1% to 2%.

We also projected earnings per share to be in the range of $0.82 to $0.86, up 11% to 16% from $0.74 in the first (Company corrected after the conference call) quarter of 2011.

Earlier this month we reported a much better than expected same-store sales gain of 9% for February.

That was aided by favorable weather throughout most of our markets.

And, with most of the quarter ahead of us, we reiterated our forecast for same-store sales to be up 1% to 2% in both March and April.

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

Thank you, John.

Again, we are pleased with our performance in the fourth quarter and fiscal year 2011.

Despite exceedingly tough multi-year comparisons for both periods, we were able to achieve solid growth in sales and earnings.

We continue to benefit from an increased focus on value by consumers, combined with the diligent execution of a number of strategies we have implemented throughout the Company.

Our top priority, of course, is continuing to strengthen our ability to acquire terrific name brand bargains for our stores.

To achieve this we are making further investments in our merchandise organization.

This is the key to both maximizing our access to the best opportunities for products and further expanding our very large vendor base.

We also believe there is still room for additional reductions in selling store inventories.

Today these levels are almost 40% lower than just four years ago, and we are targeting an additional mid single-digit percentage decrease for 2012.

Operating with less product in our stores has benefited merchandise margins due to fewer markdowns.

Turning our merchandise faster has also enhanced sales by increasing the percentage of fresh merchandise in front of our customers.

Our planning and allocation systems and processes have been rolled out for two full years now.

They are helping us do a better job of getting the right merchandise into the right store at the right time.

Planning and allocating at a much more detailed level is more important than ever today, especially with less inventory in our stores.

Our performance has also benefited from our shortage control program, which has resulted today in record low levels of shrink.

In addition, we have implemented numerous productivity enhancements and efficiencies throughout the business to drive down costs in our distribution centers, stores organization and back office functions.

All of this gives us the confidence to continue to target over the longer-term average annual earnings per share growth of 10% to 15%.

The formula for achieving this is a combination of unit growth, annual increases in same-store sales, and reductions in shares from our ongoing stock repurchase programs.

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

(Operator Instructions).

Jeff Stein with Northcoast Research.

A couple questions for you.

First of all, you had a very sharp jump in capital spending this past year.

And I'm wondering if you can just talk about your plans for CapEx for the next couple of years?

And then I do have one follow-up question.

Jeff, you're right as far as CapEx is concerned.

We did increase that spending in 2011, up from 2010.

And our estimates for 2012 are around $450 million.

And there's a couple of drivers.

One is the types of stores we are building now tend to require more capital because we are taking possession of the buildout of those stores as the capital markets have pretty much put a crimp on development of shopping centers.

The second piece is, in the distribution area we are beginning to plan the buildout of a couple of new distribution centers in the future years.

So that is taking a bit more CapEx as we get those activities ramped up and going.

Also, in the fourth quarter of this year, we purchased a corporate headquarters and we purchased another store so that added to some CapEx, as well.

Are you actually taking ownership of the stores?

We don't.

On one store we had a pretty significant opportunity where we actually did buy the store.

But that's really the exception to what we do.

We only own a couple of the thousand or more stores that we operate.

Got it.

And just a question for Mike.

Wondering if eCommerce is in your future?

I will take that, Jeff.

It's Michael O'Sullivan.

eCommerce is an area that we've certainly looked at very closely.

Our assessment is that currently it is very hard for an off-price business to make money in eCommerce, especially at the price points we operate at.

But it is something we're going to continue to look at.

And if a model starts to emerge online where we think that might change, and where we think we can make money, it's certainly something we will take a closer look at.

I would say, though, that our priority right now is, rather than online, it is actually our off-line bricks-and-mortar business.

Where we know the returns are very strong.

And we have attractive growth opportunities.

And that's really the focus for us off-line rather than online.

Got it.

Thank you.

Paul Lejuez, Nomura Securities.

It's Tracy Kogan filling in for Paul.

Two questions.

You guys guided the merch margin in F'12 to be up slightly.

Do you expect all of that to come from better inventory management?

Or are you seeing any benefit on the cost side of things as you're placing your buys?

And then the second question is, can you tell us what your guidance for F'12 assumes for distribution costs?

And whether you're assuming that packway levels stay where they are now or if the packaway is going to flow out to stores?

Thanks.

I will address the latter part of that question first, Tracy.

Our packaway levels we have planned in the neighborhood of where we are currently.

We don't see that moving up or down.

Having said that, as we know from our past, that as bargains become available, we want to take advantage of those bargains.

So there tends to be some variation to whatever those plans might be if those buys are totally opportunistic.

What was the first part of your question related to merchandise margins?

Merchandise margin and if you're seeing anything on the cost side?

From a merchandising margin standpoint, the plan for 2012 really contemplates us managing inventories tighter.

We think we can manage inventories down in the mid single-digit level, which should deliver out better markdown performance.

So that's what we are anticipating in 2012.

Great.

Thanks.

Evren Kopelman from Wells Fargo.

It is Marion Caspar in for Evren.

I was hoping you guys could elaborate a little bit on the new markets, specifically Chicago, if you can talk to what you're seeing in those markets.

Are you seeing any discrepancies from the current chain in terms of traffic and conversion?

Thank you.

Okay.

I will try and answer that, it is Michael O'Sullivan again.

It is very early in the new markets.

Those stores have only been opened around five months.

So in terms of your specific question on any unusual trends around tickets or traffic, nothing to call out.

No.

There's nothing out of line in terms of what we are seeing in the new markets versus the rest of the chain.

What I would say is, everything we've seen so far in terms of sales performance, customer research and just customer feedback, reinforces our belief that we're going to be successful in those markets long-term.

Rick Patel from Bank of America Merrill Lynch.

Can you give us a little bit more detail on the profitability for dd's?

Perhaps talk about the contribution to operating profit or earnings.

And also touch upon the strategy for that segment this year.

Sorry, Rick, you were a bit faint.

Could you just repeat the question?

Sorry about that.

Can you give us a little bit more detail on dd's?

Just talk about the contribution to operating profit or earnings.

And also touch upon what the strategy is for this year.

And as we think about that segment longer term, how many more stores do you think you need in order to really start ramping up the contribution to earnings?

I will take the first part of that in terms of performance.

As Michael mentioned in his remarks, dd's had a very solid sales performance in 2011, beating our internal plans.

But perhaps more notably, had a very strong profit performance last year.

And that profit performance was driven primarily by margins, which in turn were driven by lower inventories and a fresher supply of goods to the store.

Similar strategy to what we've used at Ross over the last few years.

So we've been very happy with dd's performance.

I don't expect -- segueing into the next part of your question -- I don't expect any major changes to strategy at dd's.

We are pretty happy with the strategic direction of that business.

Obviously we'll make adjustments and improvements to the assortment or to operations as we identify areas for improvement, but no major changes.

We're pretty happy with the direction.

Okay.

And then a question on category performance.

It seems that shoes and juniors have outperformed for some time now.

Can you just talk a little bit more about what you think is driving the strength there.

And as you think about 2012, do you see those same categories continuing to outperform or do you see other categories that are emerging as the leaders?

I think there have been very good opportunities in the market.

There's been good market direction in both those businesses.

Your last part of that question was do we see those businesses being strong in 2012 also?

The answer would be yes.

And do you see other categories also emerging to be just a strong?

I see other categories emerging to be strong.

Just as strong, I'm not so sure.

These two categories have been very, very strong.

Great, thank you.

Brian Tunick with JPMorgan.

First for Michael, just curious if you think the JCPenney customer overlaps with your customer.

And could there be an opportunity, given their new pricing strategy and maybe some market share, for you there?

And then maybe if John could talk a little more about the third quarter shrink reserve guidance, just maybe walk us through what's happening here.

It's clearly the number one thing we get a lot of questions about regarding your guidance for the year.

Okay.

In general we don't comment on other retailers' business models or strategies.

But do we overlap with Penney's customers?

I would say we do.

I don't have the number at the top of my mind right now.

But certainly any dislocations in supply that creates some uncertainties in the whole supply line usually are a good thing for off price.

That's how I look at the Penney's situation.

It's really a watch and see.

And virtually every department store customer, or most department store customers, there is some overlap with off price.

As to shortage, Brian, we take our physical inventory in the third quarter and then we will adjust whatever our accrual rate was during the third quarter.

For the first couple quarters of this year, we expect about a 10 basis point improvement.

That's just based on what we will accrue.

And in the third quarter, we'll take inventory.

For the plan for the year, because we are at record low levels of shortage, we're not anticipating any benefit to be derived out of shortage this year.

Where, over the past several years, we have had very good outstanding shortage results.

So that's not dialed into anything this year because of where we currently are.

Kimberly Greenberger with Morgan Stanley.

I just wanted to share my congratulations with everyone for a really fine 2011.

I wanted to understand dd's.

It reached profitability in 2011.

Can you share with us your longer-term vision and what you view as store potential for that concept?

And on a four-wall basis I think you had commented previously that dd's was just about in line with Ross Stores, or perhaps in line with Ross Stores.

If you could just update us on the economics of dd's, that would be terrific.

Lastly, 45 basis points of freight expense, or deleverage, in Q4.

Can you just remind us when you start to anniversary those higher freight and fuel costs in your P&L in 2012?

Thanks.

Okay.

Kimberly, you're right.

Actually dd's became profitable in 2010.

And its profitability improved further in 2011.

So we are very happy with its profit performance in 2011.

In terms of store potential, we believe that this concept can grow to about 500 stores.

And in terms of four-wall profitability, you're right.

As we've commented in the past, if you look on a four-wall basis -- and by that I mean if you take gross margin and subtract all store-related expenses -- dd's is comparably profitable to a Ross store.

So that actually gives us encouragement that as dd's builds scale over time that it's going to be an attractive business.

Kimberly, to as to the freight question.

A couple of drivers of that increase.

Obviously rates has something to do with that.

We're looking at fuel pricing this year which has to be determined on what costs will be.

We have anticipating fuel going up to some extent but we will have to see where it goes this year.

So it's a bit of a head wind for us

And store potential for dd's we look at it as 500 stores at this point.

Terrific.

Thank you.

David Mann from Johnson Rice.

Great job to everyone.

My question is, as we are starting to see some signs of the economy improving, when you look back historically, that doesn't necessary help off-price in terms of your performance, or at least relative performance.

Can you just talk about, after last year, last couple of years, where you've been outperforming the apparel industry, what might be different this time as the economy recovers that might not hurt you?

You are right.

First of all, we believe off-price, and specifically our model, off-price executed well does well in good times and bad times.

I think one thing, it has been a while since the environment's become less promotional.

Off-price, specifically Ross, we do better when we are in a non-promotional environment or less promotional environment.

So I think that would be healthy for our business.

And certainly if I coupled out the dislocation of supply that could be going on now, based on changes in strategies, that will help fuel our supply line during this period.

And finally, I think our packaway position puts us in a much better position, in a very strong position, to do well if the economy starts to move a little up tempo.

So less promotional environments, though, in a better economy, we think will be good for us.

And one other big difference from the last time that we've been in the good economic situation, a lot of retailers have gone away.

So I think we find ourselves in a better position just by surviving.

And being a reasonably profitable retailer in this time.

Thank you.

Good luck in '12.

Laura Champine from Collins Stewart.

John, my question is for you.

Ross has done a great job of exceeding its same-store sales guidance on a pretty consistent basis.

And it still looks like the outlook is conservative.

Can you give us some insight in how you formulate your same-store sales outlook?

Sure.

When we look at the year, single year and over multiple years, our objective is to grow earnings 10% to 15% from that.

We'll basically go bottoms-up.

We will figure out the store growth needed to arrive at that.

We'll also figure out a top level that seems reasonable.

Keep in mind that this year we are up against three pretty spectacular years a 5, a 5 and a 6.

So we're up against some pretty heavy numbers.

In our business, if we can make the P&L work, and see that 10% to 15% earnings potential on a pretty reasonable comp, good things happen if we exceed that comp.

So we do tend to plan the business with a conservative bias and we always hope to do better.

John, are you taking into account, when you said that comp guidance, what changes are taking place in the competitive environment?

Sure, we take all that into consideration.

Thank you.

Richard Jaffe from Stifel Nicolaus.

Just wanted some more color on the new markets.

The 20 new stores in new markets, would that be in addition to the Chicago metro region?

Or is there another region you're going to enter?

And if you could also comment on Chicago's contribution, as simplistic as you can.

I know you're not going to provide earnings by store but some sense of traffic or volume compared to new stores in existing markets?

Yes.

As Michael commented, about one-third of the new stores this year will be in new markets.

Chicago is by far the biggest of those new markets.

There are a few other smaller markets in the Midwest region that will account for the rest of those 20 new stores.

In terms of how the Chicago stores are performing, again, it's too early.

Five months in.

I think we are very happy with what we've seen, but I wouldn't extrapolate from it at this point.

It is just too early.

But as a general point, everything we've seen and heard in terms of research we've conducted, customer feedback we've gotten, as well as the early performance continues to reinforce our belief that we are going to be successful in this market.

Should we read that the continued growth in new markets as a sign of success for the micro merchandising initiatives that began several years ago?

To some degree.

It is not the only thing that we've done.

I think there are a number of components that made us comfortable expanding into new markets last year.

And give us encouragement as we continue to expand.

I think micro merchandising is one piece which really is a way of adapting our assortments at a local level and trending those assortments more rapidly than we would've been able to before.

So I think that is a very important tool in new markets.

But I think some of the other investments we've made, the investment we made in the merchant group over the last five years or so, which has benefited the whole team, should also benefit new markets in that the quality of the merchandise and the quality of the assortment has gone up.

I think the other aspect is the fact that we are carrying less inventory per store which means that we are able to react much more quickly to trends that we see in an individual market.

I think there's a package of things we've done in the last few years which give us encouragement that we can be successful in the new markets.

Sure, chain-wide, as well, of course.

Thank you very much.

Marni Shapiro from The Retail Tracker.

Congratulations on a great quarter and a great year.

You've been pretty quiet about the home business.

And I was just curious if we can get a little bit of an update on the home business at Ross Stores.

And if it is also successful at dd's.

And do you guys packaway product in this space at all?

I'm just curious.

Home business in both concepts we're very pleased with.

It's just not been in the top two performance of the Company, in both companies.

And we are very pleased with the progress we've made.

I would say we pack away some products but nothing relatively as large as we do in non-home businesses.

We use it selectively.

Excellent.

Is it a similar business at dd's as it is in Ross?

It is a little different.

It is a little less gift-driven and a little more utilitarian-driven.

Excellent, thanks, guys.

Best of luck for spring.

Stacy Pak with Barclays Capital.

This is [Omer] filling in for Stacy.

In Q4 thus far we've seen much better inventory control from apparel and retailers, so far.

What are you seeing in terms of inventory availability?

Thank you.

Actually we are seeing plenty of inventory availability.

What the exact reason for that is, I know what I've been reading.

I've been reading the same things you have.

But there's been plenty of inventory in a fairly broad-based way.

All right, thank you.

Jeff Klinefelter from Piper Jaffray.

Yes, thank you.

Just a couple quick questions.

One, with respect to the inventory reductions that you've executed in the stores, the significant reductions over the last few years, I was just curious if you are now recognizing any opportunities or needs to reconsider store format, store fixturing?

Any thoughts for a net reduction in store prototype as you open new stores?

And then, one other thing, John, you commented on, a lack of shopping center development, how that's playing into your cost of real estate.

I was curious if you could elaborate on that a little more.

What are you seeing in the commercial development side?

And what's happening net-net to your real estate costs?

I will take the question on the impact of inventories, or less inventories, on our stores.

We design our stores with flexible fixtures.

And flexibility enables us to expand and contract in any given category within a store.

But as we brought down our inventories, we have a flexible model, as well, that enables us to open up smaller stores where needed.

So, based on the demographic information that we use, we will either open a smaller-sized store to fit that need or a larger store.

So the model overall is very flexible and it's worked well for us.

But in general, we have, not in a dramatic way, we have shrunk our prototype a bit over the last couple years knowing where we were going with our inventory reduction.

Jeff, on the second part of your question, when we take ownership and build out a store, the CapEx in that store is probably about $1.5 million.

If the landlord owns that, our fixturing, et cetera, cost about $0.5 million.

The $1 million you negotiate.

Obviously you negotiate your rents down so it will pay back over a period of time.

So, as we see the credit markets get re-established, development get re-established, we'd want to switch back to more of what we call a turn key approach where the landlord is owning the leasehold improvements, would be our preference.

Okay.

Just a quick follow-up on the store prototype.

Michael, is there a target prototype size, average size going forward that would deviate to some percentage from prior trends?

I would say that the prototype size is smaller than what we've opened in the past.

But we've always had a flexible model that's enabled us to open buildings that are larger than prototype.

But I'd say most of them today tend to trend more towards smaller than our average prototype.

We are finding the ability to merchandise these better than we have in the past.

It provides us with increased availability when we are flexible and are able to get different sizes.

But one of the benefits of having less inventory is we don't need as big a building.

Okay.

Thank you.

Mark Montagna, Avondale Partners.

Just following along with the questions we were just talking about.

Have you thought about moving the back wall forward to make the store look fuller?

Because there's a lot of stores where I've been in where shelves are empty, walls are empty.

And possibly improve the fullness look of the store?

I'd say we spend a lot of time and resources insuring that the customer experience is right by location.

And some of the examples that you've given, we have added walls to make sure that we have a customer-friendly environment.

And as we evolve our fixtures, and as we evolve our merchandising standards and skills, it is focused on ensuring that the store looks right and is presented in an appropriate way for our customers.

I would add that our customers seem to be responding favorably to having an environment that is easier to shop.

I understand that in some cases we are showing a little more wall, or a lot more wall and a lot more chrome.

And the customers seem to going favorably that that is not a big issue for them if they are finding the right bargains.

Okay.

And then, just along those lines, in terms of your in-store inventories, can you talk about how fast the inventory is turning now versus how fast it was turning before you got on this inventory reduction initiative?

Yes, sure, Mark.

We are not public with the exact turn number.

Clearly inventories are down 40%, sales are up, so it is turning significantly faster.

Okay.

Then just lastly in terms of expense leverage, can you talk about what comp is needed this year to leverage SG&A expense?

And what comps would be needed for the buying and occupancy portion of gross margin?

Yes, as we mentioned in the reported comments, because we planned the year without the incentive, we are picking up some leverage from that.

So this year on a 1% to 2% comp, we're leveraging a bit.

Having said that, in a more comparable year-over-year period it takes about a 3% comp to leverage the expenses.

Okay.

Thank you.

Adrianne Shapira from Goldman Sachs.

A few questions.

Perhaps talk a little bit about, if you can share with us, some quarter-to-date comp trends.

The 9% you saw in February we obviously see continued, where there's strength.

March seems to be lapping in easier comparison.

The 1% to 2% comp you've got planned for March, April maybe if you could give us a little bit more color around that in terms of any updates on quarter-to-date.

And also any sense of how you think about the Easter shift?

Adrianne, our policy is really not to comment on mid-month sales.

We'll be out with that first Thursday of April.

Any help in terms of how to think about Easter?

The 1% to 2%, it sounds like no shift, and March, April same?

I can say this about it, that I think an earlier Easter is an advantage.

That's as far as I think I can comment.

Okay.

Thank you.

And then a question about, when we think about your hitting record EBIT levels this year, and obviously next year it sounds like we are going to set a new record, how should we think about dd's as that obviously has swung into improving profitability and that becomes less of a drag?

How should we think about as that grows and that drag moderates, what potential help that could be to EBIT margins over time?

Adrianne, I'll take that.

It's Michael O'Sullivan.

As I mentioned in response to an earlier question, dd's has a pretty good four-wall contribution level.

Which tells us that as it scales up it will become more profitable as a business.

So we think the long-term prospects of dd's are pretty good.

I would caution you that right now, although dd's is profitable, it is less than 8% of our stores.

So it is really not a material impact on our overall P&L.

And it won't be for a few years.

Any sense in terms of the differential, in terms of the margin contribution, dd's versus Ross?

It's so hard to answer that because dd's has less than 100 stores, Ross has more than 1,000.

And that scale matters a lot.

So it is hard to compare the two.

I think, suffice to say, obviously we are very happy with Ross's EBIT margin.

And our long-term models tell us that as dd's scales up, dd's will have an attractive profit margin.

Okay, great.

And then my next question, you obviously have been capitalizing on, whether it is the de-storing and the value focus out there.

I'm just wondering, maybe if you could contextualize and shed some light in terms of the opportunities on the vendor relationships, what categories you're opening up.

And without naming names, but how you are seeing the share shuffle that's going on, what that's doing in terms of opening doors to new vendors?

Thanks.

There's a lot of shuffling going on in the mid tier, and I certainly couldn't comment on any vendors.

But this kind of shuffling is usually good for us.

We are a constant, we are stable, we're focused, we have a large volume buying organization, seeing lots of vendors.

So the shuffling you're talking about is usually a very good thing for us.

Perhaps any way to quantify in terms of how many vendors you've got direct relationships, last year, how that's improved year over year?

I don't think that's a number I would -- actually I don't think it's a quantifiable number.

You're asking where we've improved relationships.

We've improved relationships with a lot of vendors.

And I'm sure there are vendors you could call that say we are slightly worst than we were last year as a vendor relationship.

So don't think it's quantifiable.

Okay, thank you.

Best of luck.

Dana Telsey from Telsey Advisory Group.

Good morning, everyone.

Can you talk a little bit about the systems enhancements, the shrinkage reduction that has obviously led to margin improvement?

What is next on the docket for systems or shrinkage that we should continue to see margin improvement?

How do you think about it?

And then also, as you think about buyers, and we've always heard about adding to the buying team, where are you on the people side?

And what should be added?

Any new categories we should be watching for?

Thank you.

Let me take the first part of your question and split it into two.

I'll address the systems issue and then separately we will talk about shrink.

So on systems, the way we think about is there are three buckets of systems investment.

There's, firstly, continually upgrading and improving our systems, improving things like information security, our merchandise and operational reporting.

A bunch of things like that we do on a continual basis.

Secondly, there's systems investments that we make to improve what I would call operational efficiency within our stores or within our DCs.

And then, thirdly, there's a bucket of what I call strategic investments.

Things like micro merchandising.

We continue to look for those strategic investments, ways that IT systems investment can help the overall business.

We have some things in the pipeline.

Nothing on the scale of micro merchandising at this point, but things that we are looking at.

That's how I'd sum up the systems side of things.

I will take the shortage question.

As we said earlier, we are on our third consecutive year of record lows in shortage.

With that said, we continue to make targeted strategic investments designed to control our current levels of shortage.

But with that we are hopeful to do better.

On the buying side, in '11 I think we grew our merchant organization slightly over 10%.

And I would think we will be growing the organization about the same amount in fiscal '12.

There are new categories that we are putting into our store but in this environment I just would not be comfortable discussing them.

Thank you.

David Glick with Buckingham Research.

Add my congratulations.

Last year at this point we were trying to speculate about the impact of higher input costs and the impact it may have on your business.

I wonder if you could share your thoughts as we look out to the potential benefit of lower sourcing costs in the second half.

And what if any impact that could have on your profitability.

Certainly what happened last year in import costs was something we all have to get used to.

And the customer had to get used to a bit.

And in some cases they did, in some cases they didn't.

As we move towards fall, there are some reductions going on as cotton prices have come down significantly.

And I think the potential benefit for an off-price retailer is, as prices come down I would expect that certain places in the market will invest more in product.

If they do that and business is not strong in mainstream there will be opportunities for us.

That's how I think where I see the potential benefits for us.

Thank you.

Appreciate it.

Good luck.

(Operator Instructions).

Patrick McKeever from MKM Partners.

Just another question, I know this was already asked, but maybe I will ask it in a different way.

On the March, April same-store sales guidance, the up 1% to 2% in both months, you look back over the years and you typically do see a pretty major difference in your March same-store sales, and your April same-store sales.

Like last year, March was down 1%, April was up 10%.

That big swing is pretty clear over the years.

So I'm just wondering why.

And Easter this year is two weeks earlier.

So I'm wondering why this year would look different, why we wouldn't see some kind of a fairly significant swing those months?

I think Easter is moving a week or two.

It's two weeks.

You have some minimal move compared to when it moved in 2010 it was more significant.

So from our perspective, it is not going to be that significant in a month.

Having said that, we reiterate again, our policy is not to comment on sales mid month.

But we do want to make sure that we are prepared for the Easter season, which I think we will do fine.

And Easter obviously this year is still in fiscal April, then switching to March, obviously.

Got it.

Thank you.

There are no further questions at this time.

I will turn it back to management for any closing remarks.

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

Have a great day.

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

You may now disconnect.