羅斯百貨 (ROST) 2013 Q1 法說會逐字稿

Good afternoon, and welcome to the Ross Stores first-quarter 2013 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 based on the Company's current forecasts of the 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 2012 Form 10-K and fiscal 2013 Form 8-Ks on file with the SEC.

I would now like to turn the call over to Michael O'Sullivan, President and Chief Operating Officer.

Good afternoon.

Thank you for joining us.

I will be presenting the prepared remarks today, along with John Call, our Group Senior Vice President and Chief Financial Officer.

Michael Balmuth, our Vice Chairman and CEO is under the weather and could not be with us this afternoon.

Also on the call are Norman Ferber, Chairman of the Board; Gary Cribb, Executive Vice President, Stores and Loss Prevention; Michael Hartshorn, Senior Vice President and Deputy CFO; and Connie Wong, 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.

As noted in today's press release, we are pleased with the slightly better-than-expected sales and earnings we delivered in the first quarter, especially considering this growth was achieved on top of strong prior-year gains.

These results continue to be driven by our ongoing ability to offer terrific bargains to today's value-oriented consumers.

Earnings per share for the 13 weeks ended May 4, 2013 were $1.07, a 15% increase on top of a 26% gain in the prior year.

Net earnings for the 2013 first quarter grew 12% to $234.6 million.

First-quarter sales rose 8% to $2.54 billion, up from $2.357 billion in the first quarter of 2012.

Comparable store sales for the 13 weeks ended May 4, 2013 rose 3% over the 13 weeks ended May 5, 2012.

This compared to a robust 9% same-store sales gain for the 13 weeks ended April 28, 2012.

The strongest merchandise categories during the quarter were Juniors and Accessories, while the best performing regions were the Pacific Northwest, the Southwest, and California.

Earnings before interest and taxes grew to a record 14.9% of sales, up from 14.4% in the first quarter of 2012.

This increased level of profitability was mainly driven by higher merchandise gross margin and also benefited from favorable timing of expenses.

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

As we ended the first quarter, total consolidated inventories increased about 8%, compared to the prior year, with average in-store inventories down about 3%.

Packaway, as a percentage of total inventories, was even with last year at 45%.

Both Ross and dd's DISCOUNTS sales and profits continue to benefit from our ability to flow a larger percentage of fresh merchandise to our stores by operating our business with lower inventory levels.

Dd's sales and profitability improved in the first quarter, as its merchandise offerings also continued to resonate well with their target customers.

Our store expansion program remains on track, with about 80 locations scheduled to open during 2013, comprised of approximately 60 Ross and 20 dd's DISCOUNTS.

Now, John will provide further color on the first quarter results and details on our second quarter guidance.

Thank you, Michael.

Our 3% comparable store sales gain in the first quarter was primarily driven by an increase in the size of the average basket.

Operating margin grew by about 50 basis points in the quarter to 14.9%.

A 45 basis point improvement in the cost of goods sold was mainly driven by higher merchandise margin, which grew by about 50 basis points over last year, including approximately 5 basis points from a lower shrink accrual.

Freight and distribution costs declined by approximately 10 basis points each.

The latter was mainly due to timing of packaway-related expenses.

These favorable items were partially offset by approximately 15 basis points in higher buying costs and 10 basis points of deleveraging on occupancy.

Selling, general, and administrative expenses declined about 5 basis points, mainly due to lower store expenses as a percent of sales.

During the first quarter, we repurchased 2.3 million shares for a total purchase price of $138 million.

We are on track in 2013 to buyback about half of our new two year $1.1 billion authorization, or approximately $550 million in common stock.

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

For the 13 weeks ending August 3, 2013, we are targeting same-store sales to increase 1% to 2% over the 13 weeks ended August 4, 2012.

This compares to a strong 7% increase in last year's second quarter.

Earnings per share for the second quarter of 2013 are projected to be in the range of $0.89 to $0.93, up from $0.81 last year.

This represents forecasted EPS growth of 10% to 15%, on top of a 27% increase in the second quarter of 2012.

Our EPS targets for this year's second quarter 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 previously mentioned, same-store sales that are forecast to be up 1% to 2%.

We plan to open about 26 net new stores during the period, including 19 Ross Dress For Less, and 7 dd's DISCOUNTS.

We are targeting operating margin to be flat to up 20 basis points, on top of an exceptional 110 basis point increase in the prior year, for a projected range of 12.8% to 13%.

We are planning net interest expense to be approximately $500,000 and our tax rate is expected to be about 38%.

We also estimate weighted average diluted shares outstanding of about 217 million.

Moving to our outlook for the year, as noted in today's press release, we now project earnings per share for the 52 weeks ending February 1, 2014 to be in the range of $3.70 to $3.81.

This compares to our initial forecast of $3.65 to $3.80 and earnings per share of $3.53 in fiscal 2012.

As previously reported, the 53rd week last year added about $0.10 to earnings per share in fiscal 2012.

This updated guidance range reflects that approximately $0.02 of the above planned earnings per share results in the first quarter is related to favorable timing of expenses that are expected to shift into subsequent quarters within the fiscal year.

Finally, as a reminder, we will no longer be reporting sales or providing sales guidance on a monthly basis.

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

Thank you, John.

Again, we are pleased with our solid first-quarter performance, especially considering our strong prior-year comparisons and the ongoing uncertain macroeconomic retail and political environment.

We remain well positioned as an off-price retailer with an ongoing focus on offering compelling discounts on name-brand fashions to today's value focused customers.

Looking ahead, we will stay focused on the most critical drivers of our business.

First, we will continue to make strategic investments in our merchandise organization.

Prioritizing and expanding these resources remains the key to further increasing our very large vendor base and our access to the best name-brand bargains in the marketplace.

Secondly, as we have said before, we continue to fine tune our systems and processes to plan and allocate at a much more detailed level, which strengthens our ability to deliver great bargains to the right store at the right time.

This initiative is more important than ever, especially with the lower levels of inventory we now carry, plus our current expansion into new markets.

Over the balance of 2013, we are planning selling store inventories to be down in the low single-digit range versus the prior year.

As you know, operating on leaner inventories has improved sales, inventory turns, and gross margin for many years now.

Finally, we continue to implement numerous productivity enhancements and efficiencies throughout the Company.

These programs have helped us to strictly manage expenses in our distribution centers, stores organization, and back-office functions.

The successful execution of these initiatives has dramatically improved our sales productivity and profitability over the past several years.

We believe our ongoing focus on these priorities will maximize our opportunity for future growth in sales and profits over both the short and long term.

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

(Operator Instructions)

Daniel Hofkin, William Blair & Company.

Nice results.

Just a couple quick questions as it relates to the sales trend over the balance of the year, I know you're -- it sounds like you're keeping the 1% to 2% full-year comp plan.

How would you expect traffic versus ticket to contribute for the year as a whole?

Daniel, in the first quarter, traffic was fairly flat.

The contribution came from the average basket, which was up slightly.

That kind of stuff is tough to predict.

We think we do a good job of putting attractive bargains in front of customers, that helps drive traffic, so we don't plan our business around necessarily what we think traffic or basket is going to do, but the customers tend to self-select.

I would expect more of the same -- comps up 1% to 2%, traffic flat to up slightly.

Okay.

As it relates to margin expectations for the second quarter or for the full year, can you shed any more light, in terms of between gross and SG&A, what your expectations are?

Sure.

Implicit in the guidance is inventories, as we said, would be down low single digits.

That implies faster turns on the 1% to 2% comps, so we would expect some incremental gross margin increase, partially offset by some deleverage in G&A.

Okay, great.

Thanks very much.

Mike Baker, Deutsche Bank.

Two questions -- one, can you talk to us about what's going on with your home-related business, which I think had been an area where you had as well, but were making some changes there?

Are we starting to see any benefited traction from those changes?

And then, secondly, can you tell us how your new markets are performing?

Chicago, particularly, you've been there now for at least one year, I think, as part of the comp base.

So, if you can talk to us about how those stores are comping, and how the initial productivity is, et cetera?

Thanks.

Sure.

Mike, on your first question about home, we actually feel good about the progress that we are making in home.

As we came into the year, we had a plan to strengthen assortments in the home business, and that plan is on track, so we're feeling good about the progress we're making there.

On your second question, regarding new markets, as you referenced, we entered the Midwest region in October of 2011.

So, it is still relatively early, but everything we have seen so far, in terms of sales, customer research, and on-the-ground customer feedback, has been positive, so we're feeling good about how those markets are going.

At this point, although as you mentioned there are a few stores that have turned comp, they haven't been comp for very long, so I wouldn't call out those or talk about those specifically.

Okay, but those new markets in line with plan, above plan, below plan, as expected?

They are on plan to slightly better, yes.

Great, thank you.

Brian Tunick, JPMorgan.

Congrats, guys.

I guess, sorry to do it to you again, but regarding a lot of calls around JC Penney, and perhaps, they are going to be more promotional in driving traffic, so hoping you could talk about any data you have regarding your perspective of where market share might have come from the last two years?

And, anything you could share about your core shopper -- how many different retailers do you think they visit, so it's not just about JC Penney, I think, as we look at 2013?

Thanks very much.

Sure.

Brian, as we have spoken before, I think one of the most important characteristics about the apparel retailing market is just how fragmented it is.

There are many, many competitors.

And as a result of that, we never take our customers for granted.

They have plenty of choice about where they shop.

The important thing for us is that we focus on delivering great bargains; and if we do that, then frankly, it doesn't really matter what any single competitor does.

We know we will do well.

One other point I would make, specific to -- you referenced JC Penney, specific to JC Penney, is that obviously JC Penney had a promotional strategy, I think, until February of 2012, and if you look at the years leading up to that, we did very nicely.

So, if they go back to the future, I don't think it will cause us too much concern in terms of our long-term trend.

Laura Champine, Canaccord.

Good afternoon, and nice quarter.

My question is about the sales guidance.

It looks really conservative given what we're hearing from other retailers.

And, I know you don't have exposure to the nasty weather in the Northeast, but your trend in the most recent month was really strong.

The 1% to 2% comp guidance for this quarter, what's driving that?

When we came into the year, Laura, we cited a few headwinds that were built into our guidance.

There's some economic issues, the higher payroll taxes, sequester cuts, and then frankly, the fact that we are up against very strong comps from the last few years.

So frankly, none of those things have changed.

We're happy with how we did in the first quarter, but those economic headwinds are still there.

And frankly, if you look at it over a three-year stacked basis, our guidance actually seems pretty reasonable.

So, maybe the guidance is a little bit conservative, and we certainly hope to do better; but right now, we are comfortable with that sales guidance.

Thank you.

John Kernan, Cowen.

I guess, thematically, how much faster can you turn inventory?

And, how much more can you possibly benefit from lower in-store inventory levels, from a merch-margin perspective?

Then I've got one follow up.

At this point, John, we think there's some additional incremental opportunity, which is why we're trimming inventories again this year.

And certainly, our sales trend doesn't seem to have suffered from that, so I think the real answer is, we don't know how much opportunity there is left.

We think there is probably some, but at this point, it's probably incremental.

And then, can you talk about some of the buying opportunities you've had, given some of the weather volatility that's affected full-price retail?

Sure.

It's hard for us to isolate the drivers of supply, whether it's weather or the economy or competitive issues, but talking with Michael Balmuth earlier and talking with the merchants, I know we're very happy about the supply that we're seeing.

Great, thanks.

Marni Shapiro, Retail Tracker.

It's Mark Friedman pinch hitting for Marni.

Can you talk a little bit more detail about some of the strategic investments in the merchandise organization?

Is there anything new that you've done in the last couple months, since you reported year end, or the way you're thinking about it going for 2014?

Thanks.

Mark, I think people who have followed us for some years know that we have long regarded the merchant organization as critical.

It's the key strategic asset that you have in off price, so we have invested a lot, over the years, in terms of developing one of the best merchant organizations that there is.

So, it's really been a very long-term program, long-term initiative for us.

I wouldn't say there's anything new that we've done.

It's just more of the same in terms of strengthening that merchant group.

Great.

Thank you.

David Mann, Johnson Rice.

In terms of the comment you made earlier about traffic, in past years, even in, I think, the fourth quarter you saw nice traffic gain, so I'm curious if you can put context onto why you think traffic might be moderating now?

And, do you have any efforts to, specifically, to try and drive traffic or expand the customer reach?

David, that traffic number, which was flattish, that doesn't concern us a whole lot.

It ebbs and flows -- 1 point here, 1 point there, so we don't think it's a necessarily a bad fact in terms of what we have going on.

Our comps came through, sales came through, we are seeing good flows, so we are not overly concerned.

And then, the ticket gain, is that coming more from units or price?

Mainly coming from price, at least, in the quarter it was.

Okay.

Then, in terms of SG&A, I think on the last call and in previous calls, you have talked about being able to leverage your leverage point for expenses at about 1% to 2%.

I guess in the first quarter, you didn't necessarily leverage, or hardly levered, with the higher comp; and then, for the year, you are not talking about it too much.

So, are you seeing a higher level of expense, or is that leverage point changing at all?

No, we think -- so, we may have said 1% to 2%, really when we look at it, it is probably 2% to 3%.

There's timing issues between quarters, and all that sort of thing, but on the year, we think -- should deliver some leverage, flat to some, and that's where we are.

Okay, great.

Thank you.

Oliver Chen, Citigroup.

Regarding a longer-term question, where do you think your operating margin can go, and would that be more gross margin or SG&A leverage-driven?

And as a follow-up, if you could -- it sounds like there's a lot of opportunities, domestic bricks and mortar, but could you update us on your thoughts on global and eCom?

Thank you.

Sure.

Oliver, on your first question about margins, if you look at what's happened to our margin over the past several years, there's really been three drivers of our improved margin.

One is lower markdowns, which has been driven by tighter inventory controls.

The second is lower shrink, which has been driven by specific initiatives we have made around shortage control.

And then, the third has been expense leverage on ahead of planned sales.

So, when you think about those three drivers, we think that there's no reason why we should give up on any of them.

We don't see margins declining because we are not going to walk away from any of those three.

If you look at where the opportunities are going forward, for incremental margin, it's really in that third one, further expense leverage from ahead of planned sales, which is the hardest thing to predict.

To answer your question, we think there might be some additional opportunity in margin, but it's really around sales.

And, if we can -- if the sales are there, we will be able to drive margin further.

On your second question about eCommerce, as we have commented in the past, our assessment is that in eCommerce, it is very hard for an off-price business to make money, particularly at lower price points and at the price points that we operate at, with the cost of shipping, the cost of marketing, taking returns, et cetera, the economics just don't add up.

Now, most of the activity in the last few years, externally, has been with companies that operate at much higher price points, price points that we don't really compete at, and even those companies appear to be struggling to make money.

So we don't regard eCommerce as a high priority, at least not right now.

For us, the priority is really our bricks-and-mortar business, our offline business, where we know we can be successful.

We know we have strong returns, and we have plenty of growth opportunity, so that's really where our focus is.

Thank you.

As a quick follow up, could you tell us how you feel about the health of the consumer?

Do you feel like you continue to see volatile trends in relation to how macroeconomically, that customer, what kind of challenges they might be facing?

Sure.

Our observation is that the overriding characteristic about this economy is it's very unpredictable and that the consumer remains pretty stretched and that they are looking for value.

And in that kind of environment, we would expect, I think you would expect, that the off-price model, when it's well executed, should do pretty well.

Thank you very much.

Roxanne Meyer, UBS.

Thanks, and congratulations on a terrific quarter.

I'm wondering, first, if you could share any benefit from the calendar shift, both in 1Q and looking ahead to the remaining quarters of the year, how timing may have an impact on the cadence of your earnings?

And then, second, Juniors has been a source of strength for you for a while now.

Just wondering if you have noticed any difference in trends between the consumer who is purchasing that category, whether disproportionately driving traffic or price or units, versus some of your other demographics?

Thanks.

On the first question about the calendar, Roxanne, there is a shift that favors the first part of the year.

We have a week dislocation that doesn't match up from a sales-reporting standpoint versus a fiscal- or earnings-reporting standpoint.

It's probably worth about 1 point comp.

That comes back in the back half, so the back half is actually hurt by about 1 point comp, so there's a 2-point swing between first half and back half, in terms of our business and what that extra week meant.

Roxanne, on your second question about the Juniors business, as we mentioned in the remarks, the Juniors business was one of our top performing categories in Q1.

I would go on to say, I think the Juniors business has long been an important business for us.

It's a pretty well-developed business for us, and we feel good about that business.

I think we feel good about that customer segment.

We have always done well with the younger customer.

Okay, great.

Thanks, and best of luck.

Mark Montagna, Avondale Partners.

Just a follow up on that calendar-shift question.

Is there, beyond just the comps, is there a margin shift beyond say leverage, such as merchandise margin, that might get shifted around because of the calendar change?

There is a couple other things implicit to our calendar, so recall that in the third quarter last year we picked up $0.02 based on a shortage true-up.

That isn't in the plan or the guidance, so far, and remember the 53rd week, as we mentioned in the recorded comments, we picked up an extra $0.10.

If you put that all together, normalize for everything, on the 1 to 2 comp, our guidance is that we'll grow earnings 8% to 11% for the year.

Right, but I'm thinking in terms of, if you shift say a week out of the third quarter into the second quarter, is that week that's being shifted a high-margin week or a low-margin week?

Because, I'm running across other retailers where there's an interesting dynamic that is actually kind of meaningful that way.

May see more sales, I don't think it has to do with the margin percent between the quarters, it's mainly sales that do.

Okay.

And then, the distribution expenses that are going to rise in the future with packaway, is that -- should we view that as evenly distributed between the first -- second through fourth quarters?

Yes, I'd say it's probably -- that one is a little hard to predict.

Packaway, based on where the market and conditions were, came in a little bit higher than we had anticipated coming in, and right now, would assume that would flip in the second to third quarters, but we'll have to see what opportunities look like.

Okay, thank you.

(Operator Instructions)

Dutch Fox, FBR Capital Markets.

I wanted to ask you a couple quick questions about dd's.

Just being in the stores and looking at them, they appear to be improving -- actually, they look very good year over year.

I know you only talk about that concept directionally, but could you give us -- or help us a little bit with understanding how the dd's fleet is performing, compared to the Ross Dress For Less stores?

And also, how you expect that to evolve over the course of the year?

I don't have it in front of me, but you had talked about whether or not that -- whether or not the concept is going to be accretive this year?

And if so, how much?

Thank you.

Dutch, on the first part of that question, regarding dd's, as we don't disclose dd's financials separately, mainly because the business just isn't material to the overall size of the Corporation, but I would make some comments.

We are very happy with dd's performance, and one thing I'd call out is, like Ross, dd's has benefited over the last few years from lower inventory levels.

By controlling inventories, we really been able to drive the proportion of fresh merchandise that the shopper sees at dd's, and that's also helped with margin.

So overall, we're pretty happy with the trajectory of that business.

Relative to the profitability, we're happy, like Michael said, with the four-wall contribution, and it does tend to be slightly accretive, as it was last year.

That's included in your existing guidance?

That's correct.

All right.

Thank you.

Ike Boruchow, Sterne, Agee.

Thanks for taking my question, and congrats on a nice quarter.

Just wanted to touch on some of the investments that you'll be making, I guess towards the end of this year, in terms of the two new distribution centers that will be going up -- can you remind us the timing of when those will start to come into play?

And, if there will be any impact on the P&L, in terms of any incremental expenses?

And, if there are, would that be towards the end of this year, or the beginning of next year, and how to think that through?

Sure.

CapEx, this year, is planned at about $670 million.

If you remember, that is up pretty significantly from the $424 million we spent last year.

The biggest driver of that is around the two new distribution centers that we're building.

They are scheduled to open -- one, in 2014 -- the first part of 2014, and then the other in 2015.

So, as it relates to the 2013 P&L, there is no impact.

Got you, thanks.

We have no further questions at this time.

I will turn the call back to our presenters.

Thank you.

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

Have a great day.

This concludes today's conference call.

You may now disconnect.