羅斯百貨 (ROST) 2014 Q3 法說會逐字稿

Good afternoon and welcome to the Ross Stores third-quarter 2014 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 forecast 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 FY14 Form 10-K and FY14 Forms 10-Qs and 8-Ks on file with the SEC.

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

Good afternoon.

Joining me on our 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 Vice President and 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'll be happy to respond to any questions you may have.

As noted in today's press release, we are pleased with our better-than-expected performance in the third quarter.

Our results benefited from our ongoing ability to deliver compelling bargains to our customers, which drove above plan sales gains and strong merchandise gross margin.

Earnings per share for the third quarter of 2014 were $0.93, up 16% from $0.80 in the prior year.

Net earnings for the quarter were $193 million, up from $172 million last year.

Sales rose 8%, to $2.599 billion, with the comparable store sales up 4% over the prior year.

For the first nine months of 2014, earnings per share were $3.22, up 13% from $2.86 for the same year-to-date period in 2013.

Net earnings grew to $676 million, up from $619 million for the first nine months of 2013.

Sales increased 7% to just over $8 billion, with comparable store sales up 2% over the same period in 2013.

Similar to Ross, same-store sales at dd's DISCOUNTS increased for the quarter and year-to-date periods, as their customers also responded favorably to dd's value offering.

Juniors and home were the strongest businesses at Ross during the quarter, while the Midwest and Texas were the top-performing regions.

Operating margin of 11.8% was up about 55 basis points over last year due to a 40 basis point improvement in cost of goods sold and a 15 basis point decline in selling, general, and administrative expenses.

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

As we ended the third quarter, total consolidated inventories were up 5% over last year, while packaway levels were 42% of total inventory compared to 45% at this time in 2013.

Average in-store inventories were down 2% at the end of the quarter, and we continue to target selling-store inventories for the balance of the year to be down 1% to 2%.

We also completed our 2014 store expansion program during the third quarter.

After closing some older locations at year end, we expect to end FY14 with 1,210 Ross and 152 dd's DISCOUNTS locations for a net addition of 86 new stores this year.

With respect to infrastructure investments, we closed on the purchase of our New York buying office property in September as planned, financing the transaction with proceeds from our recent public bond offering of $250 million.

During the quarter, we also brought online a new distribution center in Rock Hill, South Carolina.

While these investments create some expense headwinds in the short term, we are confident they will enhance our prospects for the continued profitable growth of our enterprise over the longer term.

Now, Michael Hartshorn will provide further color on our third-quarter results and details on our guidance for the fourth quarter and the year.

Thank you, Barbara.

Our 4% comparable store sales gain in the third quarter was driven by a combination of slightly higher traffic and an increase in the size of the average basket.

As Barbara noted, third-quarter operating margin grew 55 basis points to 11.8%.

Cost of goods sold improved by 40 basis points, benefiting from a 55 basis point increase in merchandise gross margin and a 5 basis point improvement in distribution costs due to the timing of packaway-related costs.

This was partially offset by a 10 basis point increase each in freight and buying.

Selling, general, and administrative expenses improved by about 15 basis points during the period, mainly due to leverage on the 4% same-store sales increase.

During the quarter, we bought back 1.9 million shares of common stock, for a total purchase price of $141 million.

Year to date, we have repurchased a total of 5.9 million shares for an aggregate price of $418 million.

We remain on track in 2014 to repurchase a total of $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 guidance for the fourth quarter.

As noted in today's press release, for the 13 weeks ending January 31, 2015, we continue to project a 1% to 2% increase in same-store sales and earnings per share in the range of $1.05 to $1.09.

This compares to $1.02 for the 13 weeks ended February 1, 2014.

For the fourth quarter of 2014, operating statement assumptions include the following: total sales are forecast to increase 5% to 6% on the previously mentioned 1% to 2% projected increase in same-store sales.

If sales are within this range, we would expect fourth-quarter operating margin to decline about 30 to 50 basis points to 12.2% to 12.4% on relatively flat merchandise gross margin, with some deleveraging on expenses.

As previously mentioned, buying and distribution costs are forecast to increase as a percent of sales, due to the acquisition of our New York buying office and the ramp-up of our new distribution center in South Carolina.

In addition, we are planning about $2 million in net interest expense in the fourth quarter, mainly related to our aforementioned bond offering.

Our tax rate is expected to be 37% to 38% and weighted average diluted shares outstanding are estimated to be about 207 million.

Again, if the fourth-quarter sales and margin perform in line with our forecast, then we project that earnings per share for the 52 weeks ending January 31, 2015 would increase 10% to 11% to $4.28 to $4.32.

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

Thank you, Michael.

To sum up, our ongoing focus on delivering compelling bargains on name brand fashions for the family and the home have driven respectable sales and earnings per share growth in the first nine months of the year.

It's important to note we achieved these gains in a very challenging climate for apparel retail, especially given the ongoing difficult and volatile macro-economic backdrop that continues to especially pressure the low to moderate income customer.

Looking ahead, we are pleased with our assortments as we enter the important fourth quarter.

Our merchants have done a terrific job of acquiring a wide array of exciting and sharply priced name-brand fashions and gifts to appeal to today's value-driven shoppers.

That said, we believe it is prudent to maintain a cautious outlook as we have all year, given continued uncertainty in the overall environment and the likelihood of an intensely competitive and promotional holiday season.

To address these headwinds, we will stay focused on operating our business with lean selling-store inventories and tight expense control.

As always, our most important priority is our unwavering commitment to offering our customers the best bargains possible.

We are confident that the investments we are making in infrastructure, people, and processes will further strengthen our ability to deliver the value our customers expect.

As we have said a number of times, consistently delivering on this mission will always be the key to maximizing our potential for future sales and earnings growth over both the near and the long term.

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

(Operator Instructions)

Lorraine Hutchinson, Bank of America Merrill Lynch.

Thank you, good afternoon.

Just wanted to ask about your fourth-quarter merchandise margin guidance of flat.

Is there an opportunity there, given the decline that you saw in the fourth quarter of last year on the gross margin line?

Anything to call out as opportunities there?

Yes, Lorraine this is John.

As Barbara mentioned, similar to how we've operated during the year, we are entering the quarter cautiously, optimistic that if things go our way, we can do better.

So I wouldn't read anything into -- in terms of how we have it planned flat, we do think we have some upside, if we can operate into what looks to be a very, very competitive fourth quarter.

Thank you.

Marni Shapiro, The Retail Tracker.

Hello.

Congratulations on a great quarter.

Can you talk a little bit about, we heard a lot of noise about the weather.

And I know it's not something that's usually a big deal for you.

But now that you're in the Midwest and we're coming up against a very cold third quarter of last year, can you talk a little bit about the Midwest, and how you're thinking how the third quarter was, and how you're thinking about this winter versus last winter?

Yes, Marni, it's Michael O'Sullivan.

Let me cover that with two points.

First of all, in terms of weather, weather can always be more or less favorable, especially at this time of year going into the fourth quarter.

Certainly, in the third quarter weather really wasn't a factor.

We don't know what's ahead of us in the fourth quarter from a weather perspective.

In terms of the Midwest more broadly though, we've been very happy with how we performed in the Midwest over the last few quarters.

And I think we've mentioned almost a year ago that we were unhappy with some aspects of the Midwest, particularly the assortments, and we don't think those were -- those problems weren't caused by the weather; they were caused by internal issues in terms of how we planned those assortments.

We've corrected those, so we're hoping to do better.

And as we go into the fourth quarter, we'll have to find out whether those things have paid off or not.

Fantastic, and if you can give us an update, as well, on the accessories part of the business?

Any color around it?

The accessory business the first half of the year really struggled.

What we saw in the third quarter is that we've seen some improvement; it is still trailing the chain.

We feel a little bit better about it in the fourth quarter, and we expect to be back on track by spring of 2015.

Fantastic, best of luck for the holidays.

Thank you.

Paul Lejuez, Wells Fargo.

Thanks.

As you're thinking about store growth for next year, I'm just wondering how you're thinking has evolved in terms of the optimal store size.

As you continue to grow both in existing and new markets, have you thought any differently about what is the right size for any given store, considering that you've been able to take a lot of inventory out of the stores over the last couple of years?

Thanks.

Sure, Paul, I'll take that.

This is Gary.

We have looked at our store prototype, and we have a very flexible model that allows us to take advantage of real estate opportunities, as well as right-sizing in any particular location.

Laura Champine, Canaccord.

Thanks for taking my question.

I'm wondering if you can let us know how you assess that the promotional environment will be more competitive this Q4 than it was a year ago?

Is it just the pace of the promotions, or how do you look at your competitive set?

We are anticipating that the promotional environment will be much more aggressive, and we look at two things: we look at the pace, the amount of times that our competitors promote, and we also look at the depths that they promote.

Since we're in the value business, off of mainstream retailers, we're constantly monitoring that.

Got it.

Thank you.

Daniel Hofkin, William Blair and Company.

Good afternoon, nice results.

One question I would have would be I know it is still somewhat early in this, but with gas prices coming down, how big a benefit do you think it was in the tail end of the quarter?

And is that something you think could be a potential source of upside in the fourth quarter if things hold where they are right now, not assuming they continue to go down?

Daniel, I guess conceptually, lower gas prices, in fact, anything that puts more money in the customer's pocket, is a good thing.

But, it's very difficult for us to isolate a single variable like that, like gas prices.

There are so many other factors, some good, like the decline in unemployment rates or the anniversarying of cuts in government programs, but some bad factors, as well, like the increase in part-time work or the lack of wage growth for low-income workers.

So, we're not economists, so it's hard for us to calibrate those things and trade them off against each other.

So we really don't know to what degree gas prices helped or to what degree they will help going forward.

Okay.

And then can you talk about maybe some of the other regional performance?

You talked about the best regions, what were, if there were any regions that were below the chain materially, and the same thing on the merchandise side, in terms of the other categories that maybe performed not as well or better than average?

Sure on the regions, as Barbara said in her remarks, the top-performing regions were the Midwest and Texas.

Other than that, there were no other areas of regional performance that are worth calling out.

And then on -- in terms of businesses, our top-performing businesses were juniors and home.

Okay, and by the same token, nothing else was materially different on the other direction?

That's right.

Okay and then, would you -- I missed a little bit of the part where you discussed the gross margin, the components of the gross margin.

Would you mind just repeating those quickly?

Thank you.

Sure, Daniel.

It's Michael.

So for the quarter, merchandise margin was up 55 basis points, and that was offset by freight in buying, which was about 10 basis points each, and then distribution was slightly better due to the timing of pack-away.

Okay, thanks very much.

Randy Konik, Jefferies.

Great, thanks a lot.

My question is regarding the infrastructure and process improvements, investments you're making.

You talked about some of the near-term headwinds.

When do those headwinds lift, and what are some of the measurable benefits you expect to see from these investments?

Is it things like stronger inventory turns, or what should we expect in terms of the benefit of payout long term on those investments?

Thanks.

Appreciate it.

So, Randy, it's Michael Hartshorn.

So the infrastructure investment, as we mentioned, there are really about three things: it's opening two new distribution centers and opening -- purchasing our New York buying office.

In terms of the distribution centers, it gives us the capacity to grow into what we believe to be 2,500 stores.

So that is a capacity play.

Those investments tend to be a bit lumpy, but after we get through the two new distribution centers, the second of which will open mid-next year, we shouldn't need any capacity for the next couple of years.

And can I ask a follow-up then on the buying office?

Sure.

Can you hear me?

Okay, great.

Do you expect to see any measurable change in the number of vendor partners you're using over the next five years?

How should we think about the sourcing side of the business over the next five years and how that may change or not change?

Thanks.

We're always looking to increase our vendor base, and so that's why we continue to invest in the merchant organization.

So that they can go out and build relationships to get better access to close outs and to add additional resources.

So we expect it to grow.

Got it, thank you.

Kimberly Greenberger, Morgan Stanley.

Sorry, I just realized I was on mute.

Thank you so much, and I'll add my congratulations on a really terrific quarter.

Michael, just a couple of questions for you.

Did you receive any benefit in the third quarter from your physical inventory in margin?

Also, you mentioned that traffic was up slightly in the quarter.

It sounds like you saw a bigger increase in the average basket.

Is that coming from the average unit retail price or units per transaction?

And then for Barbara, I'm wondering if your buying team is starting to see any inventory dislocation from the disruption of goods flowing through the port?

And if not yet, do you think that might be an opportunity for inventory acquisition in the future?

Thanks so much.

Kimberly on shortage, so like last year, our physical inventory results were very similar to our ongoing shortage accrual, so there was no impact of a true up during the quarter when we took the physical inventory.

Our results again improved on top of historically low levels, so we're very happy with the progress we've made there.

In terms of the composition of comp, as we mentioned in the remarks, our comp was up 4%, driven by a slight increase in transactions and a higher basket.

The basket increase was entirely driven by higher units per transaction, as AUR was flat to last year.

And as it pertains to inventory from the port, it is hard to tell.

It is -- it's a buyers market, there's a lot of merchandise in the market right now to buy.

It's hard to differentiate what's from the port or not.

But what I would say is that whenever there's a disruption like that in the marketplace, it definitely leads to supply.

So you would expect that we would see supply sometime the end of this year into beginning of next year

Great thanks, Barbara, and good luck for holiday.

Thank you.

Jeff Stein, Northcoast Research.

Good afternoon, everyone.

A question on dd's.

I'm wondering, are the same factors that are driving your performance at Ross also driving dd's with respect to traffic transaction?

And also, maybe you can talk a little bit about some of the category performance there?

Thank you.

So Jeff, as you know, we don't disclose dd's financials separately; it's just not material to the overall Corporation.

But in broad terms, as Barbara mentioned in her remarks, dd's comp performance was strong in the third quarter, so we're very happy.

Any comment, can you comment at all, Michael, on category performance at dd's?

No, we typically don't break that out separately for the dd's business.

I see, and then finally, can you talk a little bit about your business trend during the third quarter?

Was it fairly even throughout the quarter, or did it get better or worse towards the end of the quarter?

Sure, this is Michael again.

Sales ran ahead of plan for us throughout the quarter.

The strongest months were August and September when we -- when the back-to-school customer was motivated to shop.

The trends slowed a bit in October with warmer weather.

Great, and Michael, CapEx for next year, do have any thoughts?

At this point we wouldn't talk about next year.

It will come down though based on the infrastructure investments we made this year.

Okay, thank you.

David Mann, Johnson Rice.

Thank you, and let me add my congratulations on a great quarter.

Question about the SG&A line.

I'm just curious with the 4% comp, anything that held you back about leveraging that operating expense number a little bit more, which might have been expected on such a good comp?

David, it's Michael again.

I think what we've said longer-term is that we usually lever around a three comp, so with the four comp and 15-basis-point improvement, it's about in line with that longer-term model.

It is a bit worse than the second quarter, but as a reminder, we had about a 20-basis-point benefit from a legal matter.

And then in terms of inventories at the store level, what's your latest thought process about any ability to take those inventories down further?

Yes, David, as you're aware, we've taken inventory down very aggressively over the last several years, something on the order of 40%.

We continue to shave inventories and trim them where we can.

At the end of the third quarter, inventories were down 2%.

We're expecting them to be down another 1 point or 2, at the end of the fourth quarter, and then we're putting our plans together for next year.

Great, thank you very much.

Ike Boruchow, Sterne, Agee.

Hi everyone, congratulations on a great quarter.

Thanks for taking the question.

Two quick ones: I know you've already talked about this, but the merchandise margin increased 55 basis points, so sequentially better than Q2.

I'm curious, Michael, if you could just dig in what exactly helped drive the sequential improvement in the year-over-year margin gain?

And also, it doesn't look like you bought back any stock in Q3.

I can't remember the last time you didn't buy back stock in the quarter.

Was there a reason for that?

Just a timing thing?

Just curious there.

Thanks.

So first on the stock, we did buy back stock during the quarter.

We bought it back sequentially, pretty similar to what we bought back in the first half of the year by quarter, so.

And then on margin gains, the improvement during the quarter was a combination of faster turns on lower inventory, and also our ability to take advantage of the buying opportunities in the marketplace, which customers responded favorably to.

So, a little bit of markdowns and a little bit of markup drove the margin performance.

Got it.

Thanks.

Dana Telsey, Telsey Advisory Group.

Good afternoon, everyone.

Can you give an update on the planning and allocation at the more local level and what you're seeing there?

How is that going?

And then if you think broadly about improving sales productivity over the next few years at dd's and at core Ross, where should it come from and how do you think of the size of the box?

Thank you.

Okay, Dana, it's Michael O'Sullivan.

I'll take the first part of your question about more local planning and allocation.

As you know, we've rolled out a fairly major program, micro merchandising about three years ago.

And the idea of that, the intent was that we would be able to plan and trend our business at a more detailed level, a more local level.

Now it's impossible for us to isolate the impact just to micro merchandising, but certainly it's been a major enabler of our ability to reduce inventories over the last several years by making sure that we have the right product in the right place at the right time.

Thank you.

And then and then sales productivity.

The second part of your question, Dana?

On the sales productivity, where do you think -- what is an optimal sales per foot for dd's and for Ross, and what drives it there?

Is it new categories?

Is it ticket?

At a high-level I think what really drives our sales productivity is having the best values we can in the store.

And we, all the time, are looking across different categories, different areas of merchandise, even new categories, to see whether we can drive additional productivity.

That's the ongoing program.

Thank you.

Mike Baker, Deutsche Bank.

Hi.

So my question is how do you think about what's going on with department stores and how that impacts your business?

One thing we've seen this quarter and even last quarter is that department store inventories are in much better shape and their gross margins look better.

Does that raise the pricing umbrella for you?

Make it easier for you to operate and not have to discount as much?

Conversely, one risk might be that there's less product available, although I think if you're getting less from department stores, you are getting more from vendors.

How do those dynamics play out?

Thanks.

Well I would say there's a few things, Mike.

One, first of all, in terms of availability there is a lot of product in the marketplace.

In terms of department stores versus how they price, we really look at the value.

So we look at where they are in pricing versus where we need to be in pricing so that we offer the customer great branded bargains, and so that's really how we look at it.

Their level -- I'm sorry -- their level of inventory and how they promote usually increases with the level of inventory traditionally.

Right.

So I guess that's the question: their inventories have actually -- the year-over-year growth inventory is as low as it's been in five or six quarters.

So, I would suspect that they're not promoting as much, and then because of what you just said, and because of that, I would think that you wouldn't have to promote as much.

Has that had any impact on your business this quarter, or do you think it might going forward?

So actually, Mike, they have promoted significantly this quarter, both in most department stores, particularly the mid tier.

So there's been heavy promotions that have gone on this quarter, and we're expecting that to have -- to continue into the fourth-quarter.

Actually we're expecting that to get even more promotional.

We don't promote.

So we're in an everyday value business, so we have to anticipate where we think they're going to be, and then set our values based off of where we think they're going to bench their promotions.

But in Q3, they absolutely promoted, and we are anticipating them to be even more aggressive in Q4.

Okay.

Understood.

Thank you.

Roxanne Meyer, UBS.

Great, thanks and congratulations on a strong quarter.

My question is about home.

I'm just wondering how far above the chain did home perform, and can you talk to the areas of home maybe that led in performance, and whether there's still opportunity for some niches within home to still ramp up?

Thanks a lot.

We were very pleased with our performance in home.

It was better-than-expected performance.

We feel the merchants really did a fine job of delivering exciting great product at great values.

In terms of what areas performed in Q3, I really don't really think it's appropriate for me to talk through that.

What I can tell you is that in Q4, we're very focused on gifts and home.

And I would say our home performance was better than the chain, in terms of a measurement.

Great thanks and best of luck for holiday.

Richard Jaffe, Stifel.

Thanks very much.

I know you've talked about the opportunities out in the marketplace, and if you would just comment further on that the port strike seems to -- or the slow down in the Port of Los Angeles seems to have provided some opportunities, particularly not only for the season, but for pack away.

And I'm wondering how you're thinking about those opportunities, and if you might get more aggressive, given what might be the unique nature of some of the opportunities this year?

The way we look at that is pack away is really, it is opportunity, so we look at each deal on a deal-by-deal basis.

So we don't go out and say we want to raise our pack-away levels or contract our pack-away levels.

The merchants are really out in the market constantly shopping to see what becomes available, and if the port could become available a little bit sooner than later, some we would flow this quarter, some we would move into 2015, depends when we get them.

But really, the science to it, it has to be a terrific branded great value to put it into pack away so that the customer really feels good about it when it comes out the following season.

So even though you've operated in a pretty tight parameter of pack-away, 38% to 42% roughly, you wouldn't, given the circumstances, allow that to increase, should circumstances as you describe them prevail?

There is no target number up or down.

Pack away is really the result of what's available and how great the bargain is.

So if we found pack away that was terrific that we could -- and a number would go above 42%, that would be fine.

And when it drops, sometimes that's based on the quality of products that we see.

It moves -- it's a moving target; it really becomes, really goes to the value of the product and what we see and when we bring it back out to the customer, will she appreciate that?

Thanks a lot, thank you.

Bob Drbul, Nomura.

Hi, good evening.

Congratulations on a great quarter.

I guess the two questions I have, can you give an update on your thoughts around the Internet and e-commerce and any potential interest internationally?

Sure.

Bob, so on e-commerce, we've looked at e-commerce a number of times.

We continue to monitor what's happening in terms of e-commerce, but we don't have any plans to launch an e-commerce business at this point.

We operate a $10 average unit retail business, and every which way we've looked at it, we just don't see how there's an economically sustainable model at that kind of price point.

There may be at a much higher price point, but then you're no longer in the moderate off-price business.

So we don't plan to pursue e-commerce at this point.

And in terms of international, no.

No plans at this point to launch an international business.

Got it.

And on the category basis, can you talk a little bit about how you're positioned on outerwear heading into the fourth quarter?

Sure.

Our outerwear business, we plan outerwear and seasonally sensitive products in Q3 pretty conservatively.

As we get into Q4, we plan it specifically by region.

So from what we gather from the micro merchandising, which tells us which regions and which types of products, we take that along with the merchant instinct and what we see in the market.

But overall, we feel that outerwear is an opportunity for us as we go forward.

Great.

Thank you very much.

Mark Montagna, Avondale Partners.

Hi.

A question about gift-giving versus last year.

I'm wondering, did you place a bigger emphasis on gift-giving this year?

I think that's what you'd mentioned on the last call and is that across all categories, or is it primarily in the home category?

Yes.

We have increased gift-giving this year.

It is primarily in home, but it does go across apparel into other categories, whether it's in sweaters or tops or men's fleece or across the board.

Okay.

And just back to the outerwear question, did you bring it in earlier this year versus last year?

Or just curious how it anniversaries versus last year?

Seasonally sensitive product in Q3, we traditionally plan conservatively.

And if it sells, since October is kind of a dicey month, if it sells, we go out and we chase it or we pull up pack-away if we have pack-away goods available.

Sorry?

I'm referring more to Q4.

Oh, to Q4.

Yes.

We feel pretty good about outerwear.

We have -- listen, outerwear is one of the areas where we are finding our way and learning as a Company, especially as we move into these colder regions.

So our strategy for outerwear this year was really to expand the assortment and to try to really get the regionality correct of heavyweight versus midweight.

So we feel pretty good about it.

Okay.

Thank you.

Patrick McKeever, MKM Partners.

Thanks.

A question on new store productivity and new stores in general, since you continue to open 80 to 90 stores.

So the question is maybe you could provide some general commentary around your new store performance.

The way I look at it, the new stores are doing about 70% or so of a mature store volume in their first year.

So wondering if that's accurate, and what you're seeing on the real estate front, those kinds of things?

So in terms of new store productivity, as we've entered the new markets, they have fallen a bit, as expected, based on customer recognition in those markets.

In terms of how they're performing versus their plans, we're pleased with the performance.

They actually run ahead of our initial plans.

Patrick, your calculations are about right.

Okay.

And then on the real estate, any changes in terms of what's out there?

I've heard from a few retailers that the commercial real estate market is tightening up a little bit here as the economy continues to improve.

Are you seeing that in the locations that you're targeting as well?

Well I would say, Patrick, we're happy with the availability of real estate locations that we're looking at.

We have a very strong real estate team, and they're pretty well networked, so we don't see any major issues in terms of real estate availability at this point.

Okay.

All right, well thanks so much.

Stephen Grambling, Goldman Sachs.

Thanks, good evening.

Just a follow-up on one of the questions that was asked earlier on CapEx next year.

Can you remind us of some of the buckets of incremental spending that you had over the past couple of years?

And then as a follow-up to that, what's the capacity that you have for pack-away at this point?

In terms of CapEx, Stephen, so a base level without the infrastructure investments is somewhere around $400 million to $450 million.

This year we're projecting it to end about $700 million, and that includes the New York buying office for about $222 million and $150 million of DC infrastructure.

And Stephen, if you go back to 2012, you can look at base levels there.

We added 2013, and 2014 we started building DCs that will complete in 2015.

And on the last part of your question, Stephen, on packaway capacity, we operate a pretty flexible distribution infrastructure in terms of storage.

So, packaway capacity is really not a negating factor in terms of how many -- what the packaway balance can go to.

Great, thank you.

And one other follow-up, if I may.

On your plans for, not necessarily e-commerce but digital as a strategy into the holiday or any other things that you're doing differently as you described them more as you're anticipating a more promotional environment?

Thanks.

Not a lot of new news in terms of marketing.

We have over the last several years devoted more and more of our marketing budget to digital.

We see digital as a good proxy for word-of-mouth, which is something we've always relied on very heavily, that the customer will spread, will talk about the great deals they got at Ross with their friends and we see digital as a way of doing that.

So we're doing more of that this year, but other than that, nothing else significant to call out.

Okay, thank you so much.

Best of luck.

There are no further questions on the phone lines at this time.

I will now turn the call back 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.