羅斯百貨 (ROST) 2014 Q4 法說會逐字稿

Good afternoon.

And welcome to the Ross Stores fourth quarter and FY14 earnings release conference call.

(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 forecasts 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, FY14 Form 10-Qs, and FY14 and FY15 Form 8-Ks on file with the SEC.

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

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 will begin our call today with a review of our fourth quarter and 2014 performance followed by our outlook for 2015.

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

As noted in today's press release, we are pleased with our fourth quarter sales and earnings, both of which were well ahead of our expectations as our value offering on a wide assortment of name brand bargains and gifts resonated well with our customers.

Earnings per share for the fourth quarter increased 18% to $1.20, up from the $1.02 in the prior year.

Net earnings for the quarter grew to $249 million, up from $218 million last year.

Sales rose 11% for the quarter to $3.033 billion, with comparable store sales up 6% over the prior year.

For FY14, earnings per share grew 14% to $4.42, up from $3.88 in 2013.

Net earnings in FY14 grew to $925 million on sales of $11.042 billion, with comparable store sales up 3% for the year.

Like Ross, same store sales at dd's DISCOUNTS posted solid gains for the quarter and for the year, as their customers responded favorably to dd's value offering.

As a result, dd's DISCOUNTS was able to deliver another year of solid growth in ongoing operating profits in 2014.

The strength in merchandise and geographic sales trends for Ross during the fourth quarter were relatively broad-based.

Juniors continued to be the best performing category for both the quarter and the full year, while the Midwest was the strongest region for both periods.

Our fourth quarter operating margin rose 45 basis points to 13.1%, benefiting from slightly higher merchandise gross margin and leverage on expenses from our robust comparable store sales gain.

In addition, operating margin for the full year increased 35 basis points to 13.5%.

As we ended 2014, total consolidated inventories were up 9% over the prior year, while pack-away levels were about 45% of total inventories, compared to 49% last year.

Average in-store inventories were down approximately 3% at the end of 2014.

As noted in today's release, our Board recently approved a new program to repurchase $1.4 billion of common stock over the next two years through FY16.

This represents a 27% increase over the prior two-year, $1.1 billion program that was completed at the end of the fourth quarter.

The Board also recently approved an increase in the quarterly cash dividend to $0.235 per share, up 18% on top of an 18% increase in the prior year.

The growth of our stock repurchase and dividend programs has been driven by the significant amount of cash our business generates after funding store expansion and other capital needs.

We have repurchased stock as planned every year since 1993, and this is the 21st consecutive annual increase in our cash dividend.

This consistent record reflects our unwavering commitment to enhancing stockholder value and returns.

Now, Michael Hartshorn will provide further color on our 2014 results and details on FY15 full year and first quarter guidance.

Thank you, Barbara.

Let's start with our fourth quarter results.

Our 6% comparable store sales gain was driven by a combination of higher transactions and an increase in the size of the average basket.

As Barbara noted, fourth quarter operating margin grew 45 basis points to 13.1%.

Cost of goods sold was flat to last year, with merchandise gross margins increasing 10 basis points.

Occupancy levered by 15 basis points, and freight declined by 10 basis points.

Distribution expenses were also lower by 10 basis points, due to the timing of pack-away costs.

These favorable trends were offset by a 45 basis point increase in buying expenses, mainly driven by higher incentive and severance costs.

Selling, general and administrative expenses improved by 45 basis points during the period, mainly due to leverage on the 6% same store sales increase.

During the fourth quarter, we bought back 1.5 million shares of common stock for a total purchase price of $132 million, which completed our two-year, $1.1 billion stock repurchase program.

For the year, we repurchased a total of 7.4 million shares for an aggregate price of $550 million.

Let's turn now to our 2015 guidance.

As noted in today's press release, while we hope to do better, we believe it's prudent to remain somewhat cautious in our outlook due to a combination of ongoing volatility in the macroeconomic and retail climates, as well as our own tough multiyear comparisons.

In addition, our 2015 guidance incorporates pressure on earnings from recent infrastructure investments we've been making to support our long-term growth.

As a result, for FY15, we are forecasting earnings per share to be in the range of $4.60 to $4.80, up 4% to 9% from $4.42 in FY14.

The operating statement assumptions for the full year in 2015 are as follows.

Total sales are projected to grow 5% to 6% on a comparable store sales increase of 1% to 2%.

We are planning to add about 70 Ross and 20 dd's DISCOUNTS locations.

As usual, these numbers do not reflect our plans to close or relocate about 10 older stores.

Operating margin for 2015 is projected to be 13.3% to 13.5%, versus 13.5% in FY14.

This reflects our plans for a slight increase in merchandise margins that is expected to be offset by some deleveraging on operating costs if same store sales are up 1% to 2%.

Net interest expense is estimated to be about $14 million, which includes the impact from our bond offering in last year's third quarter.

Our tax rate is planned at 37% to 38%, and we expect average diluted shares outstanding to be about 204 million.

Capital expenditures in 2015 are projected to be about $450 million, down from $650 million in 2014, when we purchased our New York buying office.

Depreciation and amortization expense inclusive of stock-based amortization is expected to be approximately $340 million, up from $290 million in 2014.

Let's move now to our first quarter guidance.

For the 2015 first quarter, we are targeting earnings per share to be $1.21 to $1.26, up from $1.15 in the first quarter of 2014.

Following are the assumptions that support this range.

Total sales are projected to increase 6% to 7% over the prior year.

This sales growth is based on our plans to open 32 new Ross and 5 dd's DISCOUNTS with same store sales projected to increase 2% to 3% on top of a 1% increase in last year's first quarter.

If sales are within this range, we would expect first quarter operating margin of 14.6% to 14.8%, compared to last year's 14.6%.

In addition, we're planning about $4 million in net interest expense in the first quarter.

Our tax rate is expected to be in the range of 38% to 39%.

And weighted average diluted shares outstanding are estimated to be about 206 million.

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

Thank you, Michael.

To sum up, our ongoing ability to deliver compelling bargains on wide assortments of fresh and exciting name-brand fashions for the family and the home resulted in another year of solid sales and earnings growth in 2014.

For the balance of 2015, we will continue to focus on the initiatives that have driven our success over the past several years.

First, our top priority will always be delivering the best values possible to our customers.

As a result, we will continue to make strategic investments in merchandising.

The people and processes of this critical organization are key to gaining access to the most desirable name-brand products available in the marketplace.

Second, we will continue to operate our business with lean selling store inventory levels.

Over the past several years, we have reduced in-store inventories by more than 40%, which has contributed to improved sales and gross margins.

Again, in 2015, we are planning selling store inventories to be down slightly on top of these multiyear declines.

And finally, we will continue to maintain tight expense control in our distribution centers, stores, organizations and back office functions.

This has helped drive profitability while still enabling us to invest in the most vital areas of our business to support our long-term growth.

We believe the ongoing execution of these initiatives will result in respectable sales and earnings growth in 2015 and beyond.

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

(Operator Instructions)

First question is from Paul Lejuez with Wells Fargo.

Thanks, guys.

Just wondering if you're seeing a pickup in product availability as a result of the port slowdown and if you're assuming the benefit on the merchandise margin side in your guidance.

And then just second, separately, where are you from an AUR and basket size right now, Ross versus dd's, and how does -- how do you figure that that changes as you look to 2015 and beyond?

Thanks.

Okay, Paul.

You have a few questions there.

The first question, port availability, there's been significant port availability, and we see that continuing as we go into Q1.

Whether the seasonality becomes pack-away or flow remains to be determined.

Benefit on the gross margin, hard to estimate what that would look like without knowing what it is that you're buying.

We feel that our guidance is appropriate for where we sit today.

AUR and basket I think --

I will take that one.

The basket for Ross is a little over $30.

It's been like that for some time.

Obviously, we had a benefit in the basket this year.

In terms of AUR, Ross is a little over $10.

For both of those, dd's is about 20% less than Ross.

Thanks, guys.

Good luck.

Thank you.

And the next question is from David Mann with Johnson Rice.

Yes, good afternoon.

Congratulations on a great year.

Hello.

Thank you.

Sorry.

Thank you.

Couple quick questions.

In terms of traffic, looks like traffic is starting to pick up a little bit again for you.

Can you just talk about what you're thinking about in terms of how you're driving improved traffic and the outlook for 2015?

And then my follow-up or other question would be you've had a change in leadership I guess at dd's.

That executive left.

Could you give us some context of that if possible, what changes have happened?

Thank you.

So on your first question, David, traffic, we've been very happy with how traffic has picked up over the last couple of quarters.

In terms of plans to drive traffic, it's always the same with us.

It's all about having the best merchandise in the stores.

We found over time that's really the one thing that stimulates traffic.

In terms of dd's, what I'd say about dd's is we're very happy with how dd's performed in the fourth quarter.

Actually its comp was in line with Ross, which is obviously very good.

And we're very pleased with how that business is doing from a sales and a profitability point of view.

We continue to see dd's as a chain that can grow to 500 stores or so.

There has been a change of leadership at dd's as you mentioned.

We have a very strong senior leadership team - sorry, senior merchant team - at dd's, and for now, they're going to be reporting to Michael Balmuth.

Great.

Good luck.

Congratulations.

Thank you.

The next question is from Lorraine Hutchinson with Bank of America-Merrill Lynch.

Thank you.

Good afternoon.

You have a number of infrastructure costs running through the P&L this year.

Once those are lapped, are there other areas of investment that you expect or would you think that sales gains would flow through a bit stronger to the bottom line?

Lorraine, on the infrastructure costs, we think that in the P&L for 2015, it's probably worth about between 20 and 30 basis points of EBIT.

And obviously there's the interest related to the bond that we offered to purchase the New York buying office.

So I think we are -- obviously based on the guidance we provided for 2015, we're working hard to find offsets to those costs.

And once those are dialed in and we anniversary those costs, we won't be up against that same level of headwind.

Great.

Thank you.

The other thing I would add to that is because our last distribution center will open mid-year, it will still have some drag as we move into 2016.

Thanks.

The next question is from Marni Shapiro with Retail Tracker.

Congratulations on a great year and quarter.

Could you just give us a quick update on the stores in the Midwest and plans to expand further?

And, Michael, did I just hear that you were taken from the CEO role back to chief merchant in charge of dd's?

(laughter) It made me laugh a little bit.

Marni, we might not comment on the second point.

Fair enough.

On the first point, the Midwest, we're very happy with how the Midwest performed in Q4 and actually throughout last year.

Actually, over the last several quarters, the Midwest has been one of our top performing regions.

If you step back a little bit, when we entered the Midwest three years ago, we said we expected to build a successful business there over time, and certainly the recent progress has reinforced our confidence in that.

Was there a change in the way you're merchandising the stores or just building blocks, and as it gained momentum it's going in the right direction?

I would say in the back half of 2013, we saw some opportunities for improvement in terms of merchandising and planning.

And we executed on those at the end of 2013, and I think we saw the benefit of that during the course of 2014.

That's great.

Fantastic.

Thanks, guys.

Marni, this is Michael.

Yes, you did hear correctly.

I will do that in addition to my other responsibilities, and I hope I can be up to the test.

Well, welcome back.

I might move back to Seventh Avenue and sell you some goods.

I promise you a good deal.

The next question is from Daniel Hofkin with William Blair & Company.

Good afternoon.

Great quarter.

Just, you may have itemized this a little bit at the beginning, but could you talk a little bit about some of the better and if there were any underperforming categories or at least categories that weren't quite as strong as the chain average, a little more detail on that and regional.

And then just a follow-up question, if you could flush out maybe a little bit more on what the infrastructure investments are and just any comment on certain other major retailers recently announcing planned wage increases, any view on that.

Thanks.

It's Michael Hartshorn.

I will start with your sales question on regional performance.

As we mentioned in our comments, the Midwest was our strongest region.

Among our other regions, Texas was also very strong for us.

California, our largest region, performed just below the chain.

In terms of merchandise performance, actually the performance was very broad-based.

We did mention juniors.

Again, it's our best performing category.

In terms of infrastructure investments, if you recall last year we purchased our New York buying office.

We also opened a distribution center in the Southeast.

So both of those had a headwind in the back half of last year.

In addition, we are planning to open another distribution center mid year, so those investments taken together will have about a 25 to 30 basis point drag on earnings in 2015.

And Daniel, I think you were also alluding in the last part of your question, alluding to some of the recent announcements about wage rate increases.

Obviously those announcements are fairly recent.

But we would expect that they will have an impact on wage --on industry wage rates.

Of course they will.

In fact, we'd expect the labor market will tighten up in general as the economy improves.

We evaluate labor market trends all the time, and that will include looking at these recent announcements, and typically we set rates on a market by market basis.

We will certainly make adjustments to keep our wage rates competitive.

It's very important that we continue to attract and retain great people.

I should say that as we always do, if we do make changes, we will look to mitigate the impact of any cost increases through reductions or productivity improvements elsewhere in the business.

Just one final thought.

I think it's worth noting that rising wage rate is actually -- it's a good thing in the sense that it shows that the economy's picking up and suggests the consumer will have more money in their pocket.

So it could have a beneficial impact to retail sales.

Great.

Thanks very much.

The next question is from Anne-Charlotte Windal with Bernstein.

Thank you.

Congratulations on a great quarter.

I was wondering what your outlook is at this point on the overall consumer health and the moderate income consumer in particular.

We're not economists.

We're not trained experts in terms of what's likely to happen in the economy.

But clearly there are some positive signs.

I think lower unemployment, lower gas prices, those are good things.

We have no way of knowing whether those trends will be sustained over time.

So for us, given what continues to be an uncertain environment, the best thing for us to do is to manage our off-price business, to be as nimble and flexible as possible, which means planning and operating our business relatively cautiously, especially at the start of the year.

And then that gives us a chance to chase business if the sales trend ends up being stronger.

So bottom line is we don't really know what's going to happen in the economy, but if we manage our business flexibly, we should do just fine.

I guess my question is also around obviously you're seeing a pickup in traffic.

And so do you think this is mostly driven by the fact that you have a very competitive assortment and value, or do you think there's also a piece that the consumer in general is getting stronger?

It's always -- in retail, in our business, it's always about value.

I do think that our merchant team did a great job in the fourth quarter in particular in terms of putting great bargains in front of the customers.

That certainly helped to the extent that the consumer's feeling better, maybe because of gas prices or because of lower unemployment or for whatever reason.

So I think it's a combination of things.

Thank you.

The next question is from Bob Drbul with Nomura.

Hi.

Good afternoon.

I guess the question that I have is on the store expansion plan, are you seeing any heightened competition for locations in terms of leases and opportunities out there?

We continue to be pretty happy with the real estate availability that we're seeing.

Obviously, we plan these things several years in advance, two to three years out.

And we have a very strong real estate team, and we're very happy with the pipeline of locations that we're seeing.

Got it.

I don't know if you went over this.

Can you comment a little on the home business in terms of the trend within home and how you guys are executing that?

Our home business, we were very pleased with the home business in the fourth quarter.

It was in line with the strong comps that the Company had.

I would say that basically if you broke the home business down into three buckets, we're at various different levels of development.

In the decorative portion of our business, we're moving forward at a pretty good rate.

In the bed and bath portion of our business, it's selling a little bit behind, but we feel that we're moving in the right direction.

And then in some of the other businesses, the one off businesses that don't fit into those main businesses, pet or things along those lines, we feel like we're moving in the right direction.

So overall our home business, starting from two years ago fourth quarter, has been moving in the right direction, and in some businesses it's just taking us a little bit longer than others.

But we feel very confident in where we're going.

We feel like we have a good vision and a direction, and we feel positive about it in 2015.

Great.

Thank you very much.

The next question is from Ike Boruchow with Sterne Agee.

Hi, everyone.

Congrats on a great quarter.

Thanks for taking my question.

Just a quick one on dd's.

I was curious, are you seeing continued margin expansion within that business?

Could you talk about store productivity there?

And then has anything you've seen over the last 12 or 24 months helped you when you think about your ultimate long-term store target within that concept.

Thank you.

So Ike, yes, as I mentioned a little bit earlier, we were very happy with dd's sales performance in Q4 and actually throughout 2014.

And along with that, the business also showed very solid gains in profitability.

That's actually been a theme over the last few years with dd's, achieving solid sales gains and significant profit improvements.

That expansion in terms of operating profit has happened because we pursued very similar actions at dd's to what we've taken at Ross in terms of tight inventory control, tight expense control.

So we've been very happy with that performance.

In terms of anything we've seen in the past year or so that's caused our outlook to change, no, nothing really.

I think we put a figure out there a few years ago now of 500 stores that we thought dd's is capable of getting up to a 500 store number.

It's currently 150.

We opened around about just a little over 20 stores last year.

We will open a similar number this year.

So we continue to be very positive about dd's outlook.

Thank you.

The next question is from Mike Baker with Deutsche Bank.

Hi, guys.

A couple of follow-ups.

So you're planning on 20 to 30 basis points of expenses to run through the P&L this year.

Can you remind us what it was in 2014?

I know your initial guidance was that same 4% to 9%, but you came in significantly above that.

Did the investment costs come in lower than that 20 to 30 basis points which looks to be about $0.07 to $0.10 or so?

No, it was -- Mike, this is Michael Hartshorn.

It was in line with the 20 to 30 basis points.

It was in the back half of the year, so you'd have to half that for the full year impact.

But very similar in the back half of the year.

Then I'd say remember so in the first half of the year, we will be anniversarying the investments we made in the third and fourth quarter of 2014, and then we're putting a new DC in mid-year in 2015.

I guess in that sense, the expenses are actually higher in 2015 if we're taking just a half year in 2014 and a full year in 2015, am I thinking about that right?

That's right, with the new distribution center.

Okay.

And then one other follow-up, just on the wage discussion.

Can I infer from your comments that a wage increase was not necessarily in your guidance right now, although it is something that you might contemplate and try to mitigate at some point in the year, not really in the guidance yet?

There's some wage rate pressure in the guidance.

Obviously we operate in a number of states that have relatively high or increasing minimum wages, obviously California being a prime example.

So we built in those wage rate increases.

But there could well be for all the reasons people -- for all the reasons you read in the papers, there could be more wage pressure ahead.

That's certainly a risk, and as I said, we will look for ways to mitigate any of those increases.

Okay.

Thanks.

Makes sense.

Appreciate it.

The next question is from Oliver Chen with Cowen and Company.

Hey, congrats on a really awesome finish to the year.

Regarding the comp, could you give us a rough sense of the breakout between traffic and ticket, and in your guidance, is it mainly traffic driven in terms of what you're thinking initially?

Oliver, sure.

In terms of the comp, as we mentioned in our prepared remarks, the 6% comp was driven by a combination of higher transactions which for us is our proxy for traffic and an increase in the size of the average basket.

The basket increase was mostly driven by an increase in units per transaction, but AUR was up slightly as well.

In terms of how we think about the comp, we don't look at the breakout of traffic or transaction size.

We just look for the overall number when we're doing it.

Just a broader question, bigger picture, as you think about long-term growth drivers and how your consumer is moving, how do you think omnichannel and mobile will play out?

I know your ticket isn't particularly elevated and shipping is a real consideration in terms of the economics, but does he or she have cross-shopping aptitude?

I think the answer is yes, I'm sure.

We have quite a diverse customer base.

I'm sure many of our customers are cross-shopping.

But I would say the one thing that our customer -- the big driving factor with our customer is they're looking for value.

So as long as we can offer them great value, we will do well in terms of capturing business with that customer.

You made a couple of points about the ticket and delivery cost and et cetera.

It's very hard for someone at a $10 average unit retail to offer the kind of value that we offer in our stores.

Thank you.

Best regards.

The next question is from Kimberly Greenberger with Morgan Stanley.

Great.

Thank you.

A really fine quarter.

Barbara, you mentioned in your prepared remarks and in the press release that you're maintaining a cautious outlook here in 2015.

The fourth quarter with a 6% comp, and 18% earnings growth is probably going to stand out as one of the very best in retail.

Is there anything happening in your own business that's giving you that cautious outlook, or are you just looking out more broadly speaking across the retail landscape and believe this is the most prudent way to manage the business?

Actually, Kimberly, it's Michael.

I will answer that.

It's really the second bucket that we look out over the landscape.

We don't see anything specific.

But the environment continues to be fairly uncertain and volatile in terms of the macro economy and the retail sector, and we have our own fairly tough multiyear comparisons that we're up against.

It's really those two main factors that cause us to be a little conservative.

As you certainly heard us talk about in the past, we feel like managing our business conservatively works for us no matter what happens.

If the market is weak or promotional, it allows us to protect earnings.

If the market is stronger, we've shown for example in the most recent quarter, we've shown our ability to chase earnings, to chase business.

Great.

Thank you so much, Michael.

I just have a follow-up for Michael Hartshorn.

Can you comment on new store productivity?

It looks like the spread between sales growth and comp growth would suggest a 75% to 80% new store productivity number, but if there's a better number I could use, that would be really helpful.

Sure, Kimberly.

That's actually a little high.

As you can imagine, as we've grown our store base into new markets and also grown the dd's brand, our new store productivity has come down a bit.

It's in the range of 60% to 65% is the current level for Ross.

We don't talk about dd's.

And the good news about that is as you can see from the Midwest performance, newer stores tend to comp faster and trend up to the overall average.

Great.

Thanks so much.

And the next question is from Roxanne Meyer with UBS Securities.

Great.

Thanks.

Let me add my congratulations on a terrific quarter and year.

Two questions for you.

First, just wondering if you could comment on your 1Q comp guidance of 2% to 3%.

It's obviously above your full year guidance and typical guidance, and I'm just wondering what you're seeing out there to give you that confidence.

And secondly, I'm wondering if you could comment on your marketing strategy.

Was there anything that you did differently that really helped you drive that 6% comp in the fourth quarter or anything new to talk about for your plans for 2015?

Thanks a lot.

Roxanne, it's Michael.

First quarter guidance, we wouldn't talk about trends as we enter the year, but suffice it to say that it was our easiest compare versus last year.

Roxanne, on your question about marketing, no, nothing really changed.

Our marketing message and our marketing strategy is typically very consistent.

It's all around we offer the best values, and nothing really changed in that regard in the last quarter.

Great.

Thanks and best of luck.

And the next question comes from Neely Tamminga with Piper Jaffray.

Good afternoon.

This is Kayla Berg on for Neely Tamminga.

Wondering if you could give us any color on store performance by state and specifically looking at Texas, have you guys seen any impact there with the oil job loss?

Kayla, I think in Barbara's remarks she pointed out the top performing region was the Midwest.

What I can tell you is that Texas was pretty close behind that.

It was one of our top performing regions.

I guess the answer is no, we've seen no fallout from any of the oil, gas price declines in Texas.

Okay.

Very helpful.

Thank you.

The next question is from Dutch Fox with FBR Capital Markets.

Yes, good afternoon.

Thank you for taking the question.

I had two questions.

One regarding the new stores you're opening.

Should we think about those as fill-in stores, or are you exploring new markets?

You mentioned you're opening up a DC in the middle of 2015.

Would that be to support some new markets, or is the stores you're building this year, is that more backfill in existing markets?

And I will follow up.

Dutch, our supply chain network, our DCs, all DCs ship to all stores.

So there's no regional supply chain strategy for us.

So the new DC will support actually the whole chain.

And in terms of store growth, we will continue to grow in existing markets.

We will continue to grow in the new Midwest region that we opened, that we entered in 2011.

Great.

Thank you.

And also, I noted in your prepared comments you said that the pack-away was at 45%.

I may have misunderstood your commentary regarding the port strike.

The pack-away was down year-over-year, made it sound like you're not quite seeing any disruption yet from the port or availability from the ports but you possibly anticipate seeing it forward.

Is that right?

Just real quickly, in terms of the numbers.

Absolute pack-away levels were actually flat to last year.

The percentage was lower because we had a lot more in transit because of the port strike.

So absolute pack-away levels are actually flat to last year.

We are seeing availability from the ports.

We saw it in the fourth quarter and we continue to see it now.

Great.

Thank you.

Sorry.

One other follow-up to what Michael Hartshorn just said.

Although total inventory levels were up, as Michael said, it was largely because inbound was up.

If you look at average inventory per store, selling inventory, it was actually down 3% on an average store basis.

Okay.

Great.

And I guess just one last one.

The $4.60 to $4.80, just to 100% clarify, that does not include any wage rate, just to be perfectly clear on it.

If you were to raise wages, that would impact the high end of that $4.80 that you guided to.

It does include wage rate increases that we know about such as minimum wage increases such as California.

It doesn't include further wage rate pressure.

But then again as I said in my early remarks, we will certainly look for ways to mitigate any expense increases that we may face because of further wage rate pressure later in the year.

Thank you very much.

(Operator Instructions)

The next question is from Howard Tubin with Guggenheim Securities.

Thanks, guys.

Hey, just a quick question.

I'm just curious to know how you feel about the overall promotional environment as we enter the spring season, whether you see it as more aggressive than it was last year.

Well, I think what we're going to see in the promotional environment in 2015 is more of what we saw in the fourth quarter.

I mean, it was a very aggressive retail environment, and we think that that's going to continue into Q1.

Okay.

Thank you.

And the next question is from Dana Telsey with Telsey Advisory Group.

Good afternoon, everyone.

Congratulations.

As you think about the level of CapEx which comes down this year, given the real estate last year, what is the -- what should we see as steady state level of CapEx?

Is $450 million the right number?

How do you bucket the breakdown of CapEx and what it's spent on?

Lastly on the improvement in merchandise margin that you've been seeing, how do you see that going forward?

Does it come from categories?

Does it come from pricing?

Thank you.

Dana, in terms of capital spending, $450 million is a pretty decent baseline for future years.

In terms of how that breaks down, about a quarter of that is for new stores, a quarter is for remodels and store maintenance, a quarter is for supply chain capital spend, with our new distribution centers and other projects in the supply chain, and a quarter is technology and all other capital spend.

The next question is from Patrick McKeever with MKM Partners.

Thanks.

Hi, everyone.

Question on the weather in the fourth quarter, and just I'm wondering if you think it had much of an impact one way or the other.

It was pretty warm out west and across a good portion of your store base, and of course it was colder in the Midwest and you had outperformance in that region.

But wondering if there's anything notable there with the weather.

Patrick, I'd say overall weather wasn't a factor.

I think we did get a benefit in January.

We were up against pretty tough weather last year.

I think that was the only factor we saw in the quarter.

How about the earlier Easter?

I assume that's in the guidance.

Do you expect that to be a negative or not much of an issue?

I don't think the early Easter is much of a factor.

Weather clearly has a much more determining impact on the overall first quarter results than a shift in Easter calendar.

Okay.

Got it.

All right.

Thanks very much.

There are no further questions at this time.

I will turn the call back over to Barbara Rentler for closing remarks.

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.