羅斯百貨 (ROST) 2014 Q2 法說會逐字稿

Good afternoon and welcome to the Ross Stores second-quarter 2014 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 FY13 Form 10-K and FY14 Form 10-Q and 8-Ks on file with the SEC.

Now, I would like to turn the call over to Barbara Rentler, the Company's Chief Executive Officer.

Good afternoon.

Joining me on the call today are Michael Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Senior VP and Chief Financial Officer; and Connie Wong, Director of Investor Relations.

We will begin with a brief review of our second-quarter and year-to-date performance, followed by our outlook for the second half and fiscal year.

Afterwards, we'll be happy to respond to any questions you have.

As noted in today's press release, second-quarter sales performed at the high end of our expectations, as today's value-focused consumers continue to respond to our wide assortment of competitive name-brand bargains.

Merchandise gross margin was above plan, which coupled with strong expense control, enabled us to deliver quarterly earnings per share that were above the high-end of our guidance.

Earnings per share for the 13 weeks ended August 2, 2014 increased 16% to $1.14, up from $0.98 in last year's second quarter.

Net earnings for the period grew 12% to $239.6 million.

Second-quarter 2014 sales rose 7% to $2.73 billion, with comparable store sales up 2% on top of a 4% gain in the prior year.

For the six months ended August 2, 2014, earnings per share grew 12% to $2.30, up from $2.06 last year.

Net earnings year to date rose 8%, to $483.5 million, up from $447.7 million last year.

Both the quarter and first six months results include a one-time benefit to earnings equivalent to approximately $0.02 per share from the favorable resolution of an outstanding legal matter.

Sales for the first six months of 2014 increased 6% to $5.41 billion, with comparable store sales up 2% on a consolidated basis, versus a 3% gain in the same period last year.

Same-store sales at dd's DISCOUNTS also increased for the quarter and year-to-date periods, driving solid gains in its profits.

The strongest merchandise category for the quarter at Ross was juniors, while the Midwest and mid-Atlantic were the top-performing regions.

For the second quarter, earnings before interest and taxes grew to a record 14.3% of sales, up from 13.6% last year.

This increased level of profitability was driven by a 25-basis-point improvement in cost of goods sold, mainly due to a higher merchandise gross margin and a 45-basis-point decline in selling, general, and administrative expenses, which benefited from tight expense controls and the resolution of the aforementioned legal matter.

As we ended the second quarter, total consolidated inventories declined about 5% compared to the prior year, with average in-store inventories down about 2%.

Pack away was 43% of total inventory compared to 46% for the same period last year.

Our expansion program remained on track in the first half, with the opening of 53 new Ross and 14 dd's DISCOUNTS.

We continue to target about 95 new locations for the full year in 2014, comprised of approximately 75 Ross and 20 dd's DISCOUNTS.

Now, Michael Hartshorn will provide further color on our second-quarter results and details on our second-half guidance.

Thank you, Barbara.

The 2% comparable store sales gain in the second quarter was mainly driven by the growth in the size of the average basket, with the number of transactions flat to last year.

As mentioned earlier, operating margin grew by about 70 basis points in the quarter to a record 14.3%.

A 25-basis-point improvement in cost of goods sold was mainly driven by higher merchandise margin, which grew by about 35 basis points over last year.

In addition, freight and buying costs improved by about 10 and 5 basis points, respectively.

These favorable results were partially offset by a 15-basis-point increase in distribution costs and about 10 basis points of deleveraging on occupancy.

Selling, general, and administrative costs improved by about 45 basis points due to tight expense control, and an approximate 20 basis point benefit from resolution of the aforementioned legal matter.

During the second quarter, we repurchased 2.1 million shares of common stock for a total purchase price of $139 million.

Year to date, we have bought back a total of 4.1 million shares for an aggregate price of $277 million.

We remain on track in 2014 to buy back about $550 million in common stock, which would complete the two-year $1.1 billion authorization approved at the beginning of 2013.

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

For the 13 weeks ending November 1, 2014, we continued to project same-store sales to increase 1% to 2% and are forecasting earnings per share to be in the range of $0.83 to $0.87, up from $0.80 in last year's third quarter.

For the 13 weeks ending January 31, 2015, we are also planning same-store sales to be up 1% to 2%, with earnings per share projected to be $1.05 to $1.09, up from $1.02 for the 13 weeks ended February 1, 2014.

As a reminder, our second-half guidance incorporates interest and occupancy costs associated with the acquisition of our New York buying office and the opening of our new distribution center in Rock Hill, South Carolina.

Now, I'll provide some additional operating statement assumptions for our third-quarter EPS targets.

Total sales are expected to grow about 5% to 6%, 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 28 new stores during the period, including 20 Ross Dress for Less and 8 dd's DISCOUNTS.

We are targeting operating margin to decline 10 to 30 basis points versus last year.

Net interest expense for the third quarter is planned to be about $2 million.

Our tax rate is expected to be 36% to 37%, and weighted average diluted shares outstanding are estimated to be about 208 million.

Moving to our outlook for the full-year, we are now projecting earnings per share for the 52 weeks ending January 31, 2015 to be in the range of $4.18 to $4.26, up from $3.88 in FY13.

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

Thank you, Michael.

To sum up, our ongoing focus on delivering compelling values on name-brand fashions for the family and the home throughout our stores drove respectable sales increases and solid earnings-per-share growth in the first half of the year.

We also achieved these gains in a very challenging climate for apparel retail, especially given the ongoing difficult macroeconomic backdrop that continues to pressure our customers' discretionary spending.

Looking ahead to the second half, we will continue to offer our customers competitive discounts on wide assortments of desirable merchandise, while also running our business with lean selling store inventory.

As an off-price retailer, we have the flexibility to buy closer to need and will continue to stay very liquid with plenty of open to buy to take advantage of the great opportunities we expect to see in the marketplace over the balance of the year.

We remain confident in the resilience of our off-price business model and our ability, over time, to successfully execute the proven strategies that have enabled us to deliver solid financial results, even in challenging climates.

To provide the foundation we need to maximize our growth over the longer term, we will continue to invest in important infrastructure assets, such as new distribution centers and the purchase of our New York buying office.

Our most important focus is, and always will be, our unwavering commitment to offering shoppers the best bargains possible.

We are confident that the ongoing investments we are making in our merchandise organization's people and processes will further strengthen our ability to deliver the value our customers expect.

Consistently delivering on this mission will always be the key to optimizing our potential for future sales and earnings growth.

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

(Operator Instructions)

Brian Tunick, JPMorgan.

Thank you, and congratulations on the pretty tough quarter out there.

Barbara, curious on your comment about the juniors category; I know it's been a standout now for at least a year or two.

Wondering what other categories you also are excited about and you see as an opportunity to drive comps in the back half?

And then, on the flat traffic result, and I know obviously also coming off a couple years of strong results, but can you highlight, in addition to marketing, what are some other things that you and the Organization are looking at in order to improve on the flat traffic numbers?

Thanks very much.

First, let me start with the comment on juniors.

Yes, our juniors has been one of our strongest business for years.

I would also say that we feel pretty strongly that we're making great progress on our home business.

We have really -- in the second quarter, progressed in our assortments and we -- excuse me one second -- we're moving in the right direction.

We've stabilized our leadership, and we've identified some ideas to attack the business.

In the second quarter, home ended in line with the chain, but the sales progressed as the quarter progressed.

We are actually feeling pretty positive about home for the back half and for gift-giving, and we feel that there's really more to come in that business.

Brian, on the second question about traffic, as Barbara mentioned in her remarks, traffic levels were flat in the second quarter versus last year.

In terms of what we are doing to stimulate traffic, really our focus is always to improve the assortments.

We find that's always the most effective way to drive traffic.

So basically, it's the things that Barbara just highlighted, juniors, home, et cetera, those are really going to be the things that stimulate traffic in our stores.

Bob Drbul, Nomura Securities.

Hi, good afternoon.

The question that I have is, with the Midwest performing at the top of the chain right now, does that impact your geographic plans for the region?

Can you comment a little bit more about some new store openings and how the new store productivity are tracking?

So, Bob, as Barbara said in her remarks, we are very happy with how the Midwest performed in the second quarter.

That is actually the second quarter in a row where the comp performance has been pretty good.

I would caution you, in 2013, we were not happy with the trend in the Midwest, and we've made some changes to the assortments.

Those changes have started to pay off, and that's why we are seeing the performance we're seeing; however, we are now going into the back half of the year.

The weather obviously gets cooler and cold weather assortments are very important in that region.

We are going to need to get that right, and we are focused on that.

In terms of new stores more generally, we're pretty happy with how new stores are opening.

I would say that's been true for the last couple of years.

New store productivity has been very good.

We've been very happy with it.

Great.

Thank you very much.

Ike Boruchow, Sterne Agee.

Hi everyone, thank you for taking my question and congratulations.

A question about the inventory, packaway about 3 points lower year over year.

Is there anything more to that in terms of the buying -- that transpired during the quarter, the buying environment, anything you could share?

What I would say is that in the second quarter, we really kept ourselves liquid, and we were able to flow a lot of the great deals that we got and pass along the bargains to the customer.

Okay.

Thanks.

Daniel Hofkin, William Blair & Company.

Nicely managed quarter.

Question about the second-half guidance, a little bit -- not so much the comps, but the margins that you are expecting.

You just had a quarter where obviously some of it was the legal settlement, but still a nice improvement in the book to gross margin and SG&A.

Just wondering, aside from the 1% to 2% comp versus the 2% that you just reported, what would make the operating margin decline 10 to 30 in the third quarter?

Is that conservatism, or is there some other factors there related to some of the investments that you are making?

Dan, in terms of the back half guidance, what we said in the comments is the infrastructure investments we're making to open the new DC and the purchase of the New York buying office.

Those, along with the legal settlement in the second quarter that obviously won't repeat in the second half.

These represent the difference between the first-half EPS growth and the high-end of the second-half guidance.

In terms of EBIT margin impact, the infrastructure investments represent roughly 30 basis points of EBIT margin, along with the additional interest cost to finance the New York buying office.

Okay.

Can you just remind us, again how that infrastructure -- so, 30 basis points, that's within the third quarter alone?

Third and fourth quarter.

Okay.

Pretty similar over the back half, overall.

Yes.

A little bit more in the fourth quarter, because we open the DC mid-quarter and finance the New York buying office mid-third quarter.

Could I ask you to provide a little more color on other categories and regional performance?

Sure.

During the quarter, juniors was the strongest performer; accessories trailed the chain for us in some of the merchandise categories.

Geographically, the Midwest and Mid-Atlantic were the strongest and Pacific Northwest trailed the chain, due in part to the strong comps in 2013 when they were one of the strongest performing regions.

Great.

Thanks.

Best of luck in the third quarter.

Thanks.

Stephen Grambling, Goldman Sachs.

Hi, good afternoon.

A follow-up on the guidance question: it looks like you are anticipating a bit of a slowdown it looks like on a two-year stack basis as it relates to the comp.

Is there anything that's underscoring that?

Is there anything you can talk to in terms of the comp and traffic trends throughout the quarter and back to school?

In terms of the comp trends during the quarter, sequentially, the comps improved as we progressed through the quarter, and July was the strongest month for us, Stephen.

Then in terms of the outlook, Stephen, the comp guidance reflects how we feel.

We think the moderate customer continues to be under pressure.

We haven't seen a lot of evidence that that's going to change in the back half.

We could be wrong, but we don't see a lot of evidence of that, and we expect the environment to remain pretty promotional.

If I can sneak one follow-up in to change gears a little bit.

You do have some lumpy CapEx coming up.

Is there any reason with the interest rate environment where it is, why you wouldn't take on some leverage to fund the distributions, for example?

Thank you.

Yes, Stephen, we do.

As Michael mentioned, we do plan to take on a little bit of leverage to finance the New York buying office.

Overall, as we look at our capital structure, we've looked at various different scenarios, different risk-return profiles.

We actually like the flexibility of our current capital structure; it gives us the ability to grow, take advantage of opportunities as we see them.

As you know, our first priority has always been investing in the business, investing in the growth of the business, and then returning cash to shareholders.

Our preference is to return cash to shareholders in more of a planned and deliberate way as opposed to a one-time recap.

So, that's our view of our current capital structure and taking a little bit more leverage.

That's helpful.

Thanks so much.

Congratulations and best of luck.

Lorraine Hutchinson, Bank of America.

Thank you, good afternoon.

I wanted to follow-up on the drivers of the higher basket size.

Was that a higher ticket or units?

Are there any strategies in place to try to continue to drive that basket size higher in the back half?

Lorraine, as we mentioned, the 2% comp was driven by the basket as transactions were flat.

The increase in the basket was mainly driven by units per transaction, AUR was just up slightly.

In terms of strategy to continue to grow the basket size, it's really more of the same in terms of improving the assortment, making sure we have a great selection of bargains for the customer to take home.

Thank you.

Jeff Stein, Northcoast.

Thanks.

Can you tell me how you are planning to finance the buying office and how you arrived at that $2-million interest-expense assumption for Q3?

I presume we should just annualize that going forward?

Jeff, yes.

You would annualize it, and we haven't discussed how we are going to finance it yet, but it will happen mid-third quarter.

Okay.

Can you tell us -- just curious what the average basket size is right now at Ross compared to dd's?

Ross is about 30 and dd's is slightly below that.

Thank you.

Oliver Chen, Citigroup.

Hi, thank you.

Great quarter.

I had a question about the merchandise margin.

It was attractively up.

What were the main categories or dynamics driving that?

Is your expectation that that will be flattish for the back half?

Just a follow-up, if you could talk to us a little bit about how you are thinking about online over the next three to five years as part of the strategy, that would be great.

Thank you.

Sure, Oliver, our merchandise margin, the improvement was basically split between higher markup and lower markdown.

Average unit retail, that pricing was flat in the quarter.

So that higher markup was really from better buying, that's what drove a better markup.

And then obviously the improved markdowns were from tight inventory control.

Those were really the components of it.

In terms of online, we actually have quite an active program with online marketing, and we've done plenty of things there.

We plan to experiment more with those types of vehicles.

In terms of e-commerce, we don't have any plans to get into e-commerce at this point.

Okay.

The better buying, was that specific to any category, or was it as a whole in terms of your tight inventory management?

It was broad-based.

Thanks a lot.

Best regards.

Laura Champine, Canaccord.

When you look at the back half, what's your expectation for freight?

Is that pressuring gross margin in the back half?

If so, how much.

Laura, as capacity tightened up, we could see some pressure on freight.

It's all dialed into the guidance we gave in the back half.

Thank you.

Roxanne Meyer, UBS.

Great, thanks.

Good afternoon, and congratulations on a solid quarter.

I'm just wondering if you can give us an update on how you feel about your consumer and any changes in behavior between 1Q and 2Q?

It sounds like it's still a tough environment out there and your consumer is still struggling a bit, but you are obviously -- you posted a nice improvement to the comp.

I'm just wondering if you've noticed any patterns in consumer behavior.

Secondly, wondering if you could share any operational initiatives going on in store that could help drive comps in the back half of the year?

Thanks a lot.

Sure, so Roxanne, so I will take the consumer question and maybe Gary will answer the operational question.

On the consumer piece, we haven't really seen any major shifts from Q1 to Q2, but I think it's pretty apparent that the low to moderate income customer is struggling.

I think you're seeing that in some of the results that have been posted by the moderate apparel retailers.

I don't think we have anything to add to that other than the customer is challenged economically and finding this environment difficult.

Clearly, to drive comps, we need to have great merchandise.

What we do in stores is make sure that we are efficient, that we're providing the right experience for the customer when she comes in.

Some examples of that, we are in the midst of rolling out a workforce management system that should enable us to better schedule at the times that our customer is in the building.

Dana Telsey, Telsey Advisory Group.

Good afternoon, everyone.

Can you just -- brief catch-up on some of the components, in terms of shrinkage, distribution costs, and an update on dd's in terms of what you are seeing there?

Lastly, as you think about pricing going into the back half of the year, amount of clearance that you have left over versus last year.

Thank you, bye -- hi.

Dana, why don't I take those out of order?

Okay.

Thank you.

I'll talk about your question about dd's.

We were very happy with dd's in the second quarter.

dd's posted positive comps and pretty solid profit improvement.

I would say actually over a longer period of time, that's been the pattern at dd's, that we have seen good comps and improvement in profitability.

I would say that the main reasons for those improvements in profitability have been that dd's is pursuing many of the same strategies that we pursued at Ross in terms of tightened inventory control, tightened expenses, et cetera.

That's the update on dd's.

In terms of distribution, Dana, during the quarter, the DCs delevered a bit.

As a result, it was mainly related to packaway related cost.

For us, packaway processing costs are charged the cost of goods sold when pack away is sold.

So a decline in pack-away levels results in a larger charge.

In terms of the back half of the year, with the opening of the new DC, you are going to have some deleverage in the distribution centers.

Thank you.

John Kernan, Cowen.

Congratulations on a nice quarter and thanks for taking my question.

The off-price leaders, yourselves, TJX, and Burlington are opening a lot of doors.

How are you viewing the availability of inventory?

If you become co-located in the same markets as more MarMaxx stores, how are you viewing the traffic levels in those stores and the productivity levels in those stores?

Thanks.

In terms of store productivity and traffic, actually, fine.

I should say that in the 33 states that we're in, Marmaxx is in those states too, so we already compete very successfully with a broad range of retailers.

As we move into new states, there really aren't any additional retailers that we don't compete with today that we'll be up against.

It's the same cast of characters.

In terms of supply, we are seeing a plentiful supply in the amount of merchandise in the market.

Okay.

Thank you.

Mike Baker, Deutsche Bank.

I wanted to ask about the promotional environment.

Every retailer who has reported here recently has talked about it being promotional, and I think it is.

But I wanted to ask specifically what you are seeing from department stores, and if it is promotional, then it's intriguing that your merchandise margins did so well relative to last quarter.

If you could connect those dots.

And as a follow-up, I think the previous person asked about your expectations for merchandise margins within your guidance for the third quarter.

If you could review that, that would be helpful.

Thanks.

As it pertains to promotions in the market, Q2 was a highly promotional quarter, particularly in the mid-tier, and we really don't see any reason for that to change in the back half of the year.

In terms of how we got our margins, what we do is plan very conservatively, left ourselves liquid, had plenty of open to buy, and we chased most of our business.

We also had very tight inventory control in this promotional environment, which is key, so that you are always liquid and fluid and you have constant open to buy.

In terms of absolute levels, Mike, we don't break out absolute margins in the back half, other than to say it's -- what we had built in the guidance does not show the improvement we saw in the second quarter.

Thank you.

Very helpful.

Appreciate that.

Patrick McKeever, MKM Partners.

A question on systems: just wondering where things stand from a systems standpoint as you prepare to open a couple new distribution centers?

Will there be any big changes from a systems standpoint?

Where are we with micro-merchandising, in terms of the whole benefit cycle?

Patrick, on systems with regard to the DCs, there are no major new systems that we will be implementing as we open new DCs.

The new DCs will run very similar systems to the systems that are already being used in our current DCs and already fairly mature.

So, no systems I think, with the new DCs.

On micro-merchandising, as you know, we have had micro-merchandising in place for two or three years now, but at the outset we had said that over time, as the system matures, it will learn from itself and learn from the historical data.

We think we are seeing that, so we think some of the improvements we've seen in certain regions are at least partly attributable to the micro-merchandising systems and processes.

A quick one on dd's: it sounds like it's comping pretty well, fairly similarly to the Ross Stores.

How about the bottom line at dd's.

Where do things stand from a profitability and return standpoint?

Is it still a similar dynamic, where dd's is maybe slightly less profitable than Ross on a four-wall basis?

On, a four-wall basis, they are fairly similar.

They get there different ways, but the difference at this point is the leverage of the business, and it's based on the size of the business and the overhead and the DCs and the other corporate overhead.

We said before, Patrick, dd's is accretive to the business, but it's very small.

It really has a minimal impact.

But at some point down the road, it sounds like the concept could be as powerful as the Ross Stores concept, and you could open either one and still have a similar P&L.

We are very positive about dd's long-term potential.

Okay.

Thank you very much.

(Operator Instructions)

David Glick, Buckingham Research.

Good afternoon, thank you.

Just a question about marketing.

As the environment gets more challenging to generate positive traffic, I'm wondering, as you become more national in scope, you're not quite there, but as you become -- have a greater footprint, do you think over time, you might make a bigger push in terms of TV advertising or marketing spend, in general?

Your thoughts on that would be appreciated.

Thanks.

I think our marketing will expand as we expand geographically.

But, I don't think it will change radically in terms of its role in our overall business.

Our most important priority is to have the best assortments in the stores.

And what we find is if we do that, we do business and we actually achieve word-of-mouth marketing from our customer; that's really the core of the strategy.

Paid marketing in terms of TV, is helpful, but it's not the critical thing.

Great.

Thank you very much.

Good luck in the second half.

There are no further questions.

I will turn the call back over to Barbara Rentler.

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

Have a great day.

This concludes today's conference call.

You may now disconnect.