羅斯百貨 (ROST) 2013 Q3 法說會逐字稿

Good afternoon and welcome to the Ross Stores third quarter 2013 earnings release conference call.

The call will begin with prepared remarks 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 2012 Form 10-K and fiscal 2013 Form 10-Qs and 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 afternoon.

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; Michael Hartshorn, Senior Vice President and Deputy Chief Financial Officer; and Connie Wong, Director of Investor Relations.

We'll begin with a review of our third-quarter performance followed by our outlook for the upcoming holiday season.

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

As noted in today's press release, third quarter sales were in line with our guidance while earnings were better than expected, mainly due to an above-plan merchandise gross margin.

Earnings per share for the third quarter of 2013 increased 11% to $0.80, up from $0.72.

These results are on top of a 14% gain in the prior year.

Net earnings for the quarter were $171.6 million, up from $159.5 million last year.

Sales rose 6% to $2.398 billion with comparable store sales up 2%, on top of a 6% gain in the prior year.

For the first nine months of 2013, earnings per share were $2.86, up from $2.46.

These results represent a 16% increase versus 22% for the same year-to-date period in 2012.

Net earnings grew to $619.4 million, up from $550.2 million for the first nine months of 2012.

Sales increased 8% to $7.489 billion, with comparable store sales up 3%, on top of a 7% gain for the same period in 2012.

Juniors and missy sportswear were the strongest businesses during the quarter, while Florida was the top performing region.

Operating margin of 11.3% was relatively flat to last year.

As a percent of sales, an improvement in cost of goods sold was offset by an increase in selling, general and administrative expenses.

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

As we ended the third quarter, total consolidated inventories were up 7% over last year, while pack away levels were 45% of total inventories, compared to 46% at this time in 2012.

Average in-store inventories were down 2% at the end of the quarter, and we continue to target slightly lower selling store inventories for the balance of the year.

dd's DISCOUNTS had solid sales and improved profitability for the quarter, benefiting from our ongoing ability to operate the business on leaner inventory levels, while also flowing a larger percentage of fresh and exciting product to our stores.

We also completed our store expansion program during the period, with the addition of 88 Ross and dd's DISCOUNTs locations combined, year-to-date.

As usual, these numbers do not include about 10 older stores that will have been closed or relocated by the end of the year.

Now John will provide further color on our third-quarter results and details on our updated guidance for the fourth quarter and the year.

Thank you, Michael.

Our 2% comparable store sales gain in the third quarter was mainly driven by an increase in the size of the average basket.

As Michael noted, third-quarter operating margin was 11.3%.

Although flat to last year, this was above plan mainly due to 55 basis points in higher merchandise margin.

This increase was partially offset, as expected, by about 35 basis points related to a lower shortage benefit.

These results compare to last year, when our physical inventory was better than expected, and added about $0.02 of third-quarter earnings per share.

This year's physical inventory results reflect our ability to maintain record low shrink expense, in line with reduced reserves, and on top of significant improvements over the past several years.

Occupancy costs during the quarter increased about 15 basis points, while selling, general and administrative expenses delevered by about 10 basis points.

Our stock repurchase program remains on track, as we bought back 2 million shares in the quarter, for a total purchase price of $145 million.

As a result, year-to-date, we have repurchased 6.4 million shares, for a total price of $421 million.

We expect to buy an additional $129 million during the fourth quarter, keeping us on track to complete about $550 million of the two-year $1.1 billion program announced at the beginning of 2013.

Let's turn now to our guidance for the fourth quarter.

As a reminder, the 53rd week last year added about $149 million in sales, and $0.10 in earnings per share to the 2012 fourth quarter and fiscal year.

The extra week in 2012 also resulted in all fiscal quarters being one week later in 2013, versus the prior year.

While this shift is relatively neutral for the full year, it added about 1% to fiscal sales growth in the first half.

This benefit is reversing and reducing sales growth on a fiscal comparison in the second half by about 1%.

This impact is reflected in our third-quarter results, and is also embedded in the following fourth-quarter guidance.

As noted in today's press release, for the 13 weeks ending February 1, 2014, we are now projecting same-store sales to increase 1% to 2%, and earnings per share to be in the range of $0.97 to $1.01.

This compares to $1.07 for the 14 weeks ended February 2, 2013, which includes the aforementioned $0.10 benefit from last year's 53rd week.

For the fourth quarter of 2013, operating statement assumptions include the following.

As I just mentioned, we are now forecasting a 1% to 2% increase in same-store sales.

This projected growth is on top of challenging multi-year gains of 5% and 7% in the fourth quarters of 2012 and 2011 respectively.

Factoring in new store growth along with one less week of sales versus last year, total sales for this year's 13-week quarter are projected to be down 1% to 2% from last year's 14-week period.

We are targeting fourth-quarter operating margin to be down about 120 to 140 basis points to 12.3 to 12.5 as a percent of sales.

About half of this decline is related to the estimated 65 basis point benefit from last year's fourth quarter from the 53rd week.

The balance of the lower forecasted operating margin is mainly due to more conservative merchandise gross margin assumptions, compared to the first nine months of 2013.

We would also expect some deleveraging on expenses, as same-store sales only performed in line with our guidance for a 1% to 2% increase.

We are planning no net interest expense in the quarter, and our tax rate is expected to be about 37%, and weighted average diluted shares outstanding are estimated to be about 214 million.

Moving to our outlook for the full year, we are now projecting earnings per share for the 52 weeks ending February 1, 2014 to be in the range of $3.83 to $3.87.

Now, I'll turn the call back to Michael.

Thank you, John.

Our solid year-to-date financial results, especially on top of robust multi-year gains, reflect our ongoing ability to deliver compelling bargains to today's value-conscious customers.

As we enter the fourth quarter, we face our own challenging comparisons, along with ongoing uncertainty in the macroeconomic and political climates.

In addition, more retailers are planning to open earlier than prior years on Thanksgiving Day, and there are six fewer shopping days in 2013 between Thanksgiving and Christmas.

More importantly, a number of retailers have reported disappointing results over the past few quarters.

We believe all of these factors combined will create the most intensely competitive and promotional holiday selling period in recent years.

To compete in this tougher climate, our merchants have acquired a wide array of exciting and sharply priced name brand fashions and gifts to appeal to today's value-focused holiday shoppers; however, it is difficult to know if the compelling bargains we offer will be able to fully offset the impact of a more difficult external environment.

As a result, while we hope to do better, we feel it is prudent to adopt a more cautious outlook for the fourth quarter.

I want to emphasize that despite these near-term headwinds, the strategies that have driven our success over the longer term remain unchanged.

Looking ahead, we will stay intently focused on the same key initiatives that have allowed our flexible off-price model to perform well in both healthy and more challenging retail landscapes.

Number one is our ongoing commitment to strengthening our merchandising organization with investments in people, processes, and technology.

To maximize profitability, we will also continue to strictly control both inventories and expenses, fine-tune and upgrade our planning and allocation systems, and develop and implement further productivity enhancements and efficiencies throughout the Company.

We firmly believe that carefully and diligently executing these proven strategies will remain the key to maximizing our prospects for earnings and revenue growth over both the near and long term.

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

(Operator Instructions)

The first question comes from Paul Lejuez with Wells Fargo.

Just wondering if just looking at sales of pack away, just wondering how your pack away merchandise is performing.

Does the promotional environment create any risk to the margins you would normally see on your pack away merchandise, and also, just wondering from a category perspective, if there was anything specifically that's been a driver of comps, that has now slowed down for you?

Thanks.

Well, pack away is performing at our expected levels, in looking and we go through this in detail going into every selling period, we are not looking at any real risk in our pack away at all.

We feel very good about what we have coming out in pack away in fourth quarter and in early Spring.

And are we looking at any piece of our business that, if I remember the third part of the question, was, are we looking at any piece of our business where we are lacking confidence in?

And I'd say no, I think we think we're fairly well prepared.

Not so much lacking confidence, I'm just wondering if there's any categories specifically that were a driver for you that have now really slowed down, and that's something that you could look at, and say that would be one of the reasons for the slower comps.

No.

Nothing as you've described has happened.

Thanks.

Good luck.

The next question comes from Omar Saad with ISI Group.

Could you talk about, I thought you had some interesting comments about the environment.

Stepping back big picture, what do you see is the source of a lot of the views that this is going to be such an increasingly promotional holiday season, compared to years past?

Is it that shortened window where people are going to be in more of a time frame?

Doesn't seem like inventories are significantly overbought across the industry, but any color you have on that, looking at the overall environment, and what that does to your pricing umbrella as you create relative value to some of the other channels would be helpful, thanks.

Well, what we look at is, as you said, there is a shorter calendar.

Also, business toughened up for department stores and discount stores in the second quarter, giving them ample time to get very well prepared for promotional fourth quarter with again, those shortened days between Thanksgiving and Christmas.

So I think that those two aspects, and it really hasn't improved on an overall basis, as people move from the second quarter to the third quarter.

So there's no reason at all for them to soften their position, which was developing in the Second quarter.

What was the other part of your question?

I guess my follow-up would be, as you look at the flexibility in your buying process and platform, does that allow you to manage through this, and maybe recapture or fight against some of the tougher macro bigger picture issues?

Usually it does.

Certainly what it does is, one, we end up in a strong buying position, and some of that buying position will be utilized to flow in this season, some will be utilized to flow in 2014.

So, it all depends how severe and bloody it gets.

Remember, once -- it's a very short selling season this year between Thanksgiving and Christmas, so once the games begin, there's not a lot any of us can do.

And we run an every day low price business, and we think we've anticipated where prices are going, but you never can be quite sure.

Got you, that's helpful, thank you.

The next question comes from Neely Tamminga with Piper Jaffray.

Your line is open.

Great, thank you.

Just wondering if you could enlighten us on two issues.

One would be, in terms of the pattern of the quarter, I apologize if I missed this earlier, but was there a particular month within the quarter that underperformed your expectations?

We've been broadly hearing about October and August being better, and September being a little bit weaker.

Just wondering how that lined up with your expectations.

And then secondly, on the holiday hours, are you chain-wide not going to be opening up at all early on Thanksgiving?

Or are you leaving that decision to the regions and locations, just curious.

So, Neely, for the quarter we won't comment specifically, but actually the first part of the quarter was a little more healthy than the second part of the quarter, is what I'd say.

Thank you for that.

And then on your second question over the last several years, we've actually been pretty flexible in our store opening hours in general, and within reason, we look to local circumstances, to make decisions about what time stores open.

But the same is true of Thanksgiving.

As a chain, we aren't opening early for Thanksgiving, but there are some stores that will be operating extended hours, based upon the local circumstances that they are in.

Okay, thank you, best of luck.

The next question comes from Ike Boruchow with Sterne, Agee.

I guess you alluded to the back half of the quarter was weaker than the front half.

The high level question I'd ask is, do you think that's more a function of your customer demographic being under a little bit more pressure, or do you think it's more a function of your competition, and some of the moderate income big boxes just being a little bit more promotional, and your thoughts there.

Thanks.

Yes, I think it has to do with back-to-school season being the first part of the quarter, where people really have a reason to buy, with the back half of the quarter there wasn't that compelling reason.

But anything with how your customer demographic is feeling?

There was some pressure to start the year in February.

Are you seeing any of the same signs you saw to start the year, in terms of how that demographic is feeling about himself, and the shopping patterns?

No, I don't think so.

I think they've been under pressure for a number of years now.

Certainly, you had what happened nationally with the shutdown, so how much that played into that, I don't know.

Thanks very much.

The next question comes from Kimberly Greenberger with Morgan Stanley.

Michael, this year, you've been anniversarying, you really took comparisons all year.

And the third quarter seems to be the first quarter where they presented more of a challenge, I think, in the Company's ability to anniversary them.

Is there something that changed here in Q3?

And then as you look at your geographic footprint, were there areas that performed particularly well for Ross, and other areas that might have lagged the chain?

Thanks.

Kimberly, you're right.

Certainly, you're up against some pretty tough comps in the third quarter, so that 2% that we reported was on top of the 6% last year, and that itself was on top of a 5% the year before, so that's why we guided the way we did for the third quarter.

In terms of how the quarter played out, as John said, there were more reasons for the customer to shop around back-to-school, but the third quarter is tricky.

As the quarter goes on, there's a few reasons for the customer to shop, until the weather turns cold.

On your point about or your question about geographically, Florida was strong for us again this quarter.

Thank you.

The next question comes from Lorraine Hutchinson with Bank of America.

Thank you, good afternoon.

Just following up on the fourth-quarter guidance, I know a lot of the calendar shift has been well known, when you gave your initial Q4 guidance.

What were the key one or two things that you saw out there in the third quarter, that made you tweak that fourth quarter number down?

Yes, so obviously, as we track through the third quarter, that changed our perspective on the fourth quarter.

Going into the fourth quarter we want to be priced appropriately with what we anticipate is a very promotional calendar and with that, if we only do the 1% to 2% comp, it will be a little fall off in leverage.

Thank you.

The next question comes from Brian Tunick with JPMorgan.

First question, I didn't hear, at least I didn't think I heard anything on the home business, just wondering if you could talk a little bit about how home performed in the quarter, and what are your objectives either as a percentage of sales, or how you think you can continue to benefit from the housing cycle.

And then the second question is on some of the new market conversations, and how micro-merchandising is supposed to be helping you.

Can you just maybe give us some view of how some of the middle of the country markets are working and your confidence that you'll be able to move towards the East Coast over the next couple years?

Thanks very much.

The home performance, as you might remember, we went through some difficulty in home a while back, and we've been progressing on a plan to improve the business, and in the third quarter it ran at the same rate as the Company, and we see it continuing to make progress in Q4.

We have it very well positioned for our gift business, it's an important part of our store all year around, but it gets a little more important in Q4, and we think we're continuing along, and we are satisfied with the progress we're making there.

And Brian, on your second question about new markets, overall, the performance of our new markets was in line with plan for the quarter and for the year.

We've only been in new markets for just over two years, but we're very happy with what we've been able to accomplish, and we remain very confident we'll be able to build a strong business there over the long term.

You mentioned micromerchandising, that has been certainly one of the things that helped us respond, adjust assortments and respond to customer trends in that region.

The next question comes from Roxanne Meyer with UBS.

I'm wondering if you're -- just to follow up on guidance, if it's also based on anything that you're specifically seeing in November that we can extrapolate, and also, what I guess -- it was great to see your merchandise margin up nicely.

Aside from the management of inventories what else contributed to your increase in merchandise margin?

So to that question, Roxanne, clearly, the lower inventories have benefited us, with lower markdowns throughout the period, and we had a little stronger pricing in the quarter as well, so those came together nicely for us during the quarter.

As to any indications in February and what that might mean for the fourth quarter, excuse me, November I'm sorry, we just don't comment on that.

Okay, great, thanks and best of luck.

The next question comes from Bridget Weishaar with Morningstar.

As you mentioned, your competition has ramped up its act, and put together a planned promotional season, complete with marketing campaigns.

Has this increased level of competition at all influenced your marketing campaigns and the spend in that area?

And also if you could comment on social versus traditional media spend?

Thanks.

So Bridget, our marketing strategy and our marketing message has been very consistent over the years.

The message is really that we offer the best values in apparel and home fashions all the time.

There's no gimmicks, no spin, just a straightforward message, and we found that works pretty well with our customers.

They understand the message and when they come to the store, we kind of deliver on that message.

So no, no real change in terms of the every day value message that we're playing to the customer.

Now you mentioned social media.

We have been experimenting and investing in social media over the last couple years.

We have found historically that word of mouth is actually the best marketing that we have, and we have found social media a good vehicle to sort of promote word of mouth, so we've been doing a number of things in that space.

Thank you.

The next question comes from Jeff Stein with Northcoast Research.

I'm wondering if you could talk about the performance of dd's versus Ross, which showed a stronger comp increase for the quarter, and did they both report comp increases for the quarter?

dd's had very solid sales growth during the quarter, as Michael mentioned.

We don't break out dd's separately.

It's not big enough, not material to the overall Corporation, so we're very happy with dd's performance.

But can you just say whether or not they comped positively or not?

Yes, they did.

They did, okay good.

And I didn't hear anything in terms of the -- when you were discussing the comp, you talked about the size of the basket.

Did you see an increase in traffic, which has been part of the driver up through the first six months of the year?

Traffic was pretty flat to last year.

Okay, and just a question for John.

Wondering if you could just run through the economics of purchasing your buying office, and what just thought process behind that, as opposed to either renewing the lease or doing something else?

Sure, so we had a unique opportunity, we think, that gives us long term control over that space, in order to house what we believe is our most strategic asset, and that's our merchandise organization.

We think it gives an opportunity to keep that group together in one centralized location in the heart of the garment district, which we think is incredibly important to us.

We are currently working through the CapEx and financing.

Going into 2014 we'll have more to say on that, when we report our fourth quarter results.

Got it.

And the purchase actually as indicated I think in the disclosures we've made, will not be consummated until later on in 2014.

Great.

Thank you very much.

The next question comes from Stephen Grambling with Goldman Sachs.

When you look back at prior periods, when the holidays have been particularly aggressive, are there any learnings to extrapolate to this period?

What I'm trying to get at is, as you look at these types of promotional periods, do you historically end up with better product and better positioning coming out?

I think basically what we've learned is go into these periods planned very conservatively, have a lot of open to buy, and typically, there are buying opportunities within it, some of which you'll be able to use in that season, some of which, or a considerable amount, is able to be used for the following year.

But it usually turns into a buying opportunity.

Okay thanks, best of luck.

The next question comes from Daniel Hofkin with William Blair.

Just a little follow-up, and I know we've beaten the comp progression to death a little bit.

But in terms of comparing you with the demographic of some of your competitors in off price, do you feel like the back row is a greater factor for you, either macro alone, or who you're competing against, versus who some of your channel competitors are competing against?

Is that a greater factor and something that is contributing to the downshift here in the second half, in your opinion?

Daniel, I don't think we think that.

That sounds a bit more fine tuned than I think we're capable of.

But I think that what we look at is, we look at our multi-year comparison over the last three third quarters, 5% in 2011, 6% in 2012, and 2% this year.

So on a stacked basis, we think that lines up pretty well versus our competitors, and also on just a year-to-date basis, I would say that we look pretty good versus our competitors.

Okay, and as it relates to margin, was there any tradeoff between merchant margin or let's say pricing and traffic, where maybe a little bit firmer pricing, a little better margin, partly at the expense of less traffic, was that a factor at all in the complexion?

No.

Okay, and beyond a couple of the categories and regional info that you've given, can you provide any -- fill out the rest a little bit for us, in terms of what else was better or worse than the chain average?

Yes, okay, ladies was the strongest business in the store, and home, as I said, progressed nicely and ran with the Company, and we saw some improvement in our shoe business.

Shoe business, you said?

Yes.

Got it.

And then regionally you said Florida was the best, did you say anything specifically about West Coast or other markets?

West Coast was pretty much in line with the chain.

Which I guess you'd expect, so thank you very much.

The next question comes from John Kernan with Cowen.

As we look out longer term, your operating margin has come a long way and you're at a peak level here.

What gives you confidence that it can move higher?

Is it something in the merchandise margin?

Is it SG&A leverage?

Because we look out next year and longer term, what do you view as the margin driver to get you past this peak level?

Thanks.

John there are three things that have driven our operating margin over the last two years, lower markdowns from managing inventories more tightly, lower shrink from a bunch of initiatives we put in place, and expense leverage on ahead of planned sales.

I think that in each of those areas there might be some incremental upside, some.

At this point, I think it would be fairly small, but there will be some incremental upside.

So really most of the benefit from here on is from sales leverage, so our focus is really making sure we have the best merchandise and best product in the stores so we can drive sales.

Okay, thank you.

The next question comes from David Mann with Johnson Rice.

Your line is open.

Yes, thank you.

John, can you talk in a little more detail about the components of gross margin, how you think that may play out in the fourth quarter?

Yes, so as we roll into the fourth quarter, we mentioned that gross margin may be a little tougher than its been year-to-date.

We think we're going to be priced aggressively going into that quarter.

We also have some deleverage on some of the other components of gross margin in buying staff, distribution expenses, et cetera, if we just do the one to two comp.

Okay, and Michael, you mentioned a little earlier about the potential of the buying opportunity for goods.

I'm just curious, given that the department stores as you said, signaled that things were weaker starting back at the end of the second quarter, how was the buying opportunity from a pricing standpoint for goods in the third quarter?

How was it?

Yes.

It was pretty good.

So given that, it would suggest you're fairly well positioned coming into the fourth quarter from an IMU standpoint to at least have some cushion, no?

Yes.

Okay, and then one last question.

On the inventory per store, obviously you have taken significant amounts of inventory out of the store, on a per store basis.

I'm just curious, do you expect that to continue next year at all, and any thoughts about any need on a certain store basis to start putting more inventory back in the store?

We're in the process of putting together our plans for next year, David.

I think that it's likely, but we haven't finalized the plans yet.

I think it's likely that we'll trim inventory a little bit more.

We think that's worked well for us, it's increased the freshness of the product in front of the customer, and its helped to drive sales and to drive margins.

So I think we still have some opportunity there, but it's smaller than -- obviously we've taken out close to 40% of inventory per store, so it will be pretty small compared with that, but still some incremental opportunity.

And on the other part of the question, we're not looking at putting more of that back.

We're very happy with the way this has worked.

It's all about flow of product through the stores.

Very good, thank you.

The next question comes from Laura Champine with Canaccord.

Now that you've had some more time operating in the Midwest, could you update us on your thoughts for future growth in the Midwest, and also just give us a sense for how California, your most important, market is doing?

Sure, having been in the Midwest for about two years now, we're continuing to open stores, and I think you can expect for the next several years we'll continue to build-out our presence in the Midwest, adding more markets in the Midwest over time.

And in terms of California, California has been tracking pretty close to the chain for the year.

Thank you.

The next question comes from Marni Shapiro with the Retail Tracker.

Could you, Michael, you mentioned or I can't remember who mentioned it, that the size of the basket had increased a little bit.

Can you give us any color around that, and any indications about traffic?

Has your traffic been consistently good and up this year versus last year, and in particular in the third quarter?

So on the basket size, the basket slightly up.

Could be mix issues, obviously we have lower markdowns, retails are up slightly so that drove a bit of the basket up.

As to traffic trends, I think Michael alluded to the fact that traffic was flattish for the period.

But looking at the whole year in the aggregate, was it, has it been trending up for the year?

I think relatively flat for the year-to-date.

Okay, great.

Thanks, best of luck for the holiday season.

The next question comes from Mark Montagna with Avondale Partners.

Two questions.

Do you think it's possible you may be over-anticipating the difficulty between Thanksgiving and Christmas, considering some of the retailers have already implemented.

They've been basically trying to do Black Friday week ever since the beginning of November.

I would say hopefully.

I think what we found Mark is, as Michael said earlier, when we position ourselves relatively cautiously, when we keep our inventory tight, our expenses tight, but actually if it's a promotional environment, we can do okay, and we can hit our guidance.

And actually if it turns out we're wrong, we have shown that we're pretty good at chasing business, and we hope the sales trend is stronger.

Okay, and then next question is, it seems like all year, you have had some pricing power, and been able to operate at a greater price spread versus the department stores, when they have to react to promotions.

Is it, sounds as though you're expecting to maybe give back some of that pricing power in the third quarter, and if you don't have to give it back would it be fair to say your comps should be above the guidance that you're giving?

I'm not sure.

I would need you to elaborate on the question.

I'm not sure of the pricing power point.

Yes, seems as though this year, the price gap between Ross and the traditional retailers is not as great -- you've been able to maintain it, if not maybe increase it a little bit versus traditionally.

And I'm just wondering, if you're anticipating shrinking that, it sounds like you're anticipating shrinking that during this current fourth quarter.

If that doesn't happen, I guess would it be fair to say that then your comp would be stronger than what you're guiding to?

I'll put it another way.

If it's not as promotional an environment, we should do better.

Okay, which is really what I think what you're asking.

Right, okay and then just last question, do you see any white space out there for you, perhaps plus or petite sizes?

Can you phrase that differently?

Like in terms of white space.

What's the opportunity?

Yes, merchandise opportunities.

Yes, I think the special size business is an important business, and certainly nationally large size business is growing very rapidly, so I would probably say that has a bigger opportunity for most people, most retailers.

Okay, thank you.

The next question comes from Mike Baker with Deutsche Bank.

So a couple things.

First, on the third quarter.

Comps did slow, and I appreciate the tough comparison but if you look at it on a two-year stack, a three-year stack, it's pretty, it's as low as its been in years, frankly.

So what happened in your mind, was it more of a macro thing, or do you think it is much more of just a competitive situation, where some of the department stores, maybe even JCPenney, have gotten a little bit more aggressive?

No, look, we don't know for sure but our opinion is it's more macro in Q3.

There really, Q3 doesn't represent, after you get through back-to-school, a required shopping period.

It's very weather dependent or kick-off the Fall season for whatever reason dependent, so it's usually, it can be a slower start-up and it was for us, plus things just don't look that rosy out there.

Okay, so then I guess the next question, what do you do to get back, I appreciate you always guide to somewhere in the 1 to 2 range, but every quarter for the last four or five years, you've been able to beat that.

What do you do to get back to being able to beat, if it's a tough environment as you describe, do you expect traffic to get better?

Is it a trade down, or are you just sort of wait for the economy to get better?

Not a trade down.

We do our trade better.

We sharpen our prices and we execute, we should execute more effectively, and we run our inventories tighter.

That's what we do.

Okay, thanks for the color.

The next question comes from Oliver Chen with Citigroup.

Regarding the recent trends you've been seeing, what are your thoughts about the seasonal weather categories within the quarter?

Other full price retailers have been quite enthusiastic on this category.

Secondly, on your comp forecast of 1 to 2, is that going to be primarily driven by a continuation of the retail up slightly?

If you could just help us with some color there that would be great, thank you.

Our seasonal business performed as we planned it, okay?

Slightly better in some categories, a little not as good in others, but overall, about how we planned it.

Oliver, as it relates to the guidance on the 1 to 2 comp, it's difficult for us to parse out whether it's traffic or it's ticket.

What we try to do is make sure that we put the best offerings and the best bargains in the store as possible, and believe the customers will react to that.

Difficult for us to try to predict what will happen between those two levers.

The promotional environment feels to me like you would be better positioned than other retailers to benefit from a better comp, but you're taking the view that it's more prudent to be cautious.

Could you just try to help me understand that?

I don't know if I can help you understand it.

I can tell you this is what we've done whenever we felt the environment would be tricky, tricky being more promotional, we have tightened things up and gotten more conservative, and it has served us very well.

Thank you.

Best regards for the holiday season.

The next question comes from Richard Jaffe with Stifel.

Just a question on dd's.

Have you found that given the need for more traffic, the need to sell more units, have you taken a different real estate approach than Ross Stores or is it really a similar approach to demographics and store location?

Richard, dd's has quite a distinct target customer, so when we look for real estate locations we are looking for quite a different demographic.

And therefore dd's, in most cases, ends up being in a different center.

There are some exceptions to that, where there's enough of the demographics to support it, but I would say, in most cases, dd's is in a different location.

And the occupancy cost similar or the demographics play out favorably to a lower rent for dd's DISCOUNT?

Should be a lower rent, Richard, and the centers we're looking at tend to be more urban areas, and maybe in their second or third generation of occupants, so it tends to be lower rent.

Got it.

Thank you.

The next question comes from Michael Exstein with Credit Suisse.

Can you just give us some updates on what's going on in the new distribution centers, and any pressure that could be putting on your SG&A going forward?

Thanks.

Sure, Michael.

The new distribution centers, one will come on in the mid part of 2014, the other in 2015.

So although they might put a little pressure on 2014, distribution costs, they won't be that meaningful, and we'll have more to say about that when we issue guidance for 2014.

How about the home office move?

Is that hitting this year or next year?

It will hit next year.

Okay.

Thank you very much.

The next question comes from Patrick McKeever with MKM Partners.

Wondering if you could talk about your holiday merchandise and marketing strategy.

Are you going after the gifting business aggressively this year?

Is that an area that you've distorted your inventory, and what is the plan from a marketing standpoint?

I would say our marketing is slightly more aggressive than a year ago, and our inventories are more skewed towards gifting than a year ago, and that's across categories.

And then a general question on the marketplace, the buying opportunities that you've talked about a little bit, but your big competitor did characterize the environment as being better than last year and that sort of thing.

Would you agree with that assessment?

Yes.

I would.

Okay, can you elaborate a little bit?

It's a very good buying market, and there's a lot of opportunities, we're being very selective.

Some of these opportunities we'll be using this season, some of them, we'll be using in 2014.

But as business slows down, and you all see more than I do what's happened around us, the supply lines obviously were not geared for that slowdown, so there was excess supply.

Got you, okay.

Thank you, Michael.

(Operator Instructions)

The next question comes from Rick Snyder with Maxim Group.

I noticed that accounts payable to inventory is down, and pack away is down.

Can you give us some color on maybe the age of the inventory?

Is that a reason that you're looking for gross margin down?

No, not at all.

I think the payable is leverage.

That indicator has to do with timing.

I think we're up 2 points from where we were last year and pack away -- it has to do with when pack aways come in et cetera.

So I won't read anything into that as to implication in the fourth quarter.

Okay, thank you.

The next question comes from Dana Telsey with Telsey Advisory Group.

As you think about the buckets of gross margin, merchandise, buying, staff, distribution expenses, where was the most differences in the third quarter, and how are you looking at it for fourth quarter and beyond?

Thank you.

Thanks, Dana.

I'll take that.

As we mentioned merchandise margin was up 55 basis points, and we had -- shrink was negative to the tune of 35 basis points, we talked about that in the written comments or the prepared comments.

And occupancy was slightly down, given the two comp, everything else came in flattish to those numbers.

For the fourth quarter, we're looking for merchandise margin to be more flattish, as opposed to up where they have been.

We also believe that there will be pressure on occupancy and buying that we indicated, and if we only do the 1 to 2 comp, we should have pressure on G&A as well.

As we did mention in the prepared comments, we're looking for EBIT to delever 120 to 140 basis points, and about half is due to the 53rd week issue we had in 2012.

Thank you.

There are no further questions in the queue at this time.

I'd like to hand the call back to the leaders.

Well, thank you all for joining us today, and for your interest in Ross Stores, and have a great holiday.

This concludes today's conference call.

You may now disconnect.