羅斯百貨 (ROST) 2015 Q2 法說會逐字稿

Good afternoon, and welcome to the Ross Stores second-quarter 2015 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 FY14 Form 10-K and FY15 Form 10-Q and 8-Ks on the 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, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Senior Director of Investor Relations.

We'll begin our call today with a review of our second-quarter and year-to-date performance, followed by our outlook for the remainder of the year.

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

As a reminder, all earnings-per-share results and forecasts for both the current and prior year reflect our recent 2-for-1 stock split that became effective June 11, 2015.

As noted in today's press release, we are pleased with our solid sales and earnings growth for both the second quarter and first six months.

These results reflect that our assortments of compelling name brand bargains continue to resonate with today's value-focused customers.

Earnings per share for the second quarter increased 11% to $0.63, up from $0.57 in the prior year.

Net earnings for the quarter grew to $259 million, compared to $240 million for the same period last year.

Sales rose 9% for the quarter to $2.968 billion, with comparable-store sales up 4% over the prior year.

While second-quarter operating margin of 13.9% was down from last year, it was slightly better than expected.

The quarter benefited from higher merchandise margins and tight expense control that partially offset a planned increase in distribution costs related to recent infrastructure investments.

For the first six months of FY15, earnings per share increased 15% to $1.32, up from $1.15 in the prior year.

Net earnings were $541 million, up 12% from [$483] (corrected by Company after the call) million last year.

Sales for the year-to-date period rose 9% to $5.906 billion, and comparable-store sales increased 5%.

Similar to Ross, dd's posted better-than-expected gains in sales and profits for the quarter and year-to-date periods, as customers also responded positively to their value offering.

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

Juniors and home were the best performing departments, while the Midwest continued to be the strongest region.

As we ended the second quarter, total consolidated inventories were up 20% over the prior year, with pack-away levels at 46% of total inventories compared to 43% last year.

Average in-store inventories at quarter end were down slightly versus last year, while total inventories were higher, as we have taken advantage of increased close-out availability in the marketplace.

Now let's turn to our expansion program.

Store growth remains on track, with 19 new Ross and eight dd's DISCOUNTS opening in the second quarter.

For FY15, we continue to plan for about 70 new Ross and 20 dd's DISCOUNTS locations.

As usual, these numbers do not reflect our plans to close or relocate a handful of stores.

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

Thank you, Barbara.

Let's start with our second-quarter results.

Our 4% comparable-store sales gain was driven mainly by an increase in the size of the average basket, with the number of transactions up slightly from last year.

As mentioned earlier, while second-quarter operating margins of 13.9% declined 35 basis points from last year, it was better than expected.

Cost of goods sold increased 20 basis points, mainly from a 40-basis-point increase in distribution expenses that were impacted by the opening of a new distribution center during the second quarter.

Freight and buying costs also increased 10 and 5 basis points, respectively.

These unfavorable items were partially offset by a 25-basis-point increase in merchandise margins, and occupancy leverage of 10 basis points.

Selling, general and administrative expenses during the period increased by about 15 basis points.

Last year's second quarter included a one-time benefit of about 20 basis points from the resolution of a legal matter.

This prior-year comparison more than offset the expense leverage we realized from the 4% comparable-store sales increase.

During the quarter, we repurchased 3.5 million shares of common stock for a total purchase price of $176 million.

Year to date, we have bought back a total of 6.9 million shares for an aggregate price of $352 million.

As planned, we expect to buy back a total of $700 million in stock for the year under the two-year, $1.4-billion stock repurchase program approved by the Board of Directors in February 2015.

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

For the third quarter ending October 31, 2015, same-store sales are forecast to increase 1% to 2% on top of a 4% gain last year, with earnings per share projected to be in the range of $0.48 to $0.50, up from $0.46 in the 2014 third quarter.

For the fourth quarter ending January 30, 2016, we are planning same-store sales to be flat to up 1%, on top of a 6% gain last year, with earnings per share projected to be $0.60 to $0.63 compared to $0.60 last year.

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

Total sales are projected to grow 5% to 6% on the previously mentioned comparable-store sales forecast of up 1% to 2%.

We are planning to add 19 new Ross and seven dd's DISCOUNTS locations during the period.

Operating margin is projected to be 11.3% to 11.5% versus 11.8% in the prior year.

We are forecasting merchandise margin for this year's third quarter to be relatively flat, while distribution costs are expected to remain elevated over the prior year.

The higher distribution costs reflect the recent infrastructure investments and unfavorable timing of pack-away-related expenses.

Net interest expense is estimated to be about $4 million, our tax rate is planned at approximately 35%, and we expect average diluted shares outstanding to be about 406 million.

Based on our results for the first six months, and second-half forecast, we are now projecting earnings per share for the full year to be in the range of $2.40 to $2.45, up 9% to 11% over $2.21 in FY14.

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

Thank you, Michael.

While we are pleased with our better-than-expected results for the first half, we face more challenging sales and earnings comparisons over the balance of the year.

In addition, the macroeconomic environment remains uncertain, and we expect the retail landscape to be highly promotional during the fall season, especially given the recent results from other retailers.

Based on these factors, while we hope to do better, we believe it is prudent to remain cautious in forecasting our business for the second half of 2015.

To maximize our results, we will continue to dedicate our resources to address our top priority: offering customers the best bargains possible, on a wide assortment of fresh and exciting name brand fashions for the family and the home.

This will be the key of delivering respectable growth in sales and earnings, both now and in the future.

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

(Operator Instructions)

Lorraine Hutchinson, Bank of America Merrill Lynch.

Can you discuss any regional differences that you saw during the quarter and if you felt an impact from either the back-to-school tax shifts or the later Labor Day?

Sure, Lorraine.

It's Michael.

On the -- across-regionally, the results were actually fairly good, from a broad-based perspective.

We mentioned the Midwest continues to be our strongest region, which has been true over the last 1.5 years.

In terms of back-to-school markets, like all other retailers we're impacted by later sales tax holiday events, but overall that did not have a big impact for us for the quarter.

Thank you.

Daniel Hofkin, William Blair.

Just wanted to understand the traffic versus ticket dynamic.

A little bit different than one of your competitors.

Just curious whether you feel like going forward, pricing is a lever that you might choose to pull a little bit more even if it means sacrificing some ticket to drive more traffic?

And obviously you have the harder comparisons in the second half, but the 1% to 2% guidance versus the 2% to 3% initial guidance going into this quarter, is it based on seeing a slower underlying trend or are you just being conservative given the tougher compares that you have?

Thanks very much.

On your first piece, as we mentioned in the remarks, the 4% comp was driven by a combination of the larger basket and a slight increase in the transaction.

The basket was primarily driven by an increase in the units per transaction and AUR was up slightly.

In terms of overall traffic, the way we think about our sales is we focus on overall sales and it comes down to merchandising.

So based on that, we'll continue to do what's best and that is we'll try to deliver the most compelling bargains to our customers.

Daniel, on AUR, your question was would we sacrifice AUR to drive sales?

We do that all the time.

Our pricing is always intended to be very sharp and that's driven our performance over the long term.

We're all about offering great prices and great bargains so our AUR is always an area of focus for us.

In terms of the guidance, the 1% to 2% in the back half versus the 2% to 3%, we've been very pleased with our performance the last couple of quarters but there are a couple of reasons to be conservative in our guidance.

There's ongoing uncertainty in the macroeconomic and retail environment and you get a sense of that in some of the recent retailers' results, particularly from some of the department stores.

And then the second reason to be conservative is we're up against some pretty tough multi-year comparisons in the back half.

Last year's third quarter was a 4% comp, last year's fourth quarter was a 6% comp, so we're going up against those numbers.

So putting all that to the side, you and others who have followed us for a while will know that this is very much from our playbook.

We tend to manage the business relatively conservatively but we hope to do better.

And certainly if the sales trend is there, we'll chase it.

So that's the outlook.

All right.

That's helpful.

Thanks very much.

Marni Shapiro, The Retail Tracker.

The Retail Tractor?

I think I'd rather be the Retail Maserati (laughter).

It sounds like there is, as always, a lot of inventory in the market, and a lot that you've packed away.

I'm just curious if there was any - if there were any segments that you found were tougher out there and there's just really exceptional deals?

And are they segments that have done well in your stores that maybe weren't doing well in other stores?

Actually, the deals are pretty broad-based.

You're talking about which classifications of business?

Yes?

Actually, the deals have been pretty broad-based.

The supply lines have been in almost every business that we touch.

So our assortments are broad in the stores.

The availability is broad so that's why we've been able to maximize a lot of deals in the market.

Fantastic.

And are you guys doing anything differently in the back-half, marketing-wise to maybe further boost traffic or drive home the values?

Marni, not really.

Our marketing strategy and message is pretty consistent.

The message is the ways that we offer the best values.

So there's really nothing new there.

The focus, really in terms of driving traffic, is really to have the best bargains in the store.

Fantastic.

Best of luck with the back half, guys.

Oliver Chen, Cowen and Company.

We were just curious about the back half and how you're thinking about inventory planning.

Your inventories have been managed quite tightly and you've done a good job keeping your open-to-buy pretty open.

Also, I wanted to just ask you about your comments on the uncertain environment and the highly promotional landscape, just because at some of the more broad-line retailers, we've seen some really good momentum in apparel.

So I was curious about how there's mixed messages out there in the marketplace?

Sure.

On the second part of your question, the uncertain environment, I would say the results have been fairly mixed, some good, some not so good.

And certainly when we're out in the market looking for goods, it seems like there's plenty of supply, which again reinforces for us that there's some uncertainty in terms of the economic environment.

On inventory planning, just repeat your question, Oliver on inventory planning?

What were you looking for there?

Just curious about how you're planning it in the holiday season and if you can continue to grow at a lot less in-sales and if there's anything we should know about the timing of which you'll do gifting or floor sets relative to last year?

Sure.

In terms of how we're planning inventory, in Barbara's remarks, she said that in-store inventory levels were down slightly and that's how we're planning them going forward.

In terms of timing, I don't know that there's anything different there, Barbara, on--?

No.

In terms of the floor set and the gift set-ups, no.

The timing will be similar to last year.

Okay, great.

In terms of the promotional landscape, though, Oliver, the promotional landscape in Q2, it was aggressive in certain segments of the market, so we were planning on it being aggressive.

It was aggressive.

I think when back-to-school comes to an end, we're going to see that, that was very aggressive and we're going to see that continue going into the fall season, especially if some retailers are going to fall with high inventory levels.

So that would be our -- (multiple speakers).

Okay.

That's helpful.

Lastly, as we look at the weather, do you have any differentiation in terms of how you're thinking about certain categories in light of the forecast?

I'm just curious about outerwear and any read-throughs there about categories as it relates to weather as we approach the back half?

Nothing that we'd call out at this point, Oliver.

Nothing at that detailed level.

Okay.

Thank you very much.

Best regards.

Richard Jaffe, Stifel.

Just a follow-on.

The inventory build-up, we should assume is in pack-away and you've been able to take advantage of some of the disruption in the ports to buy opportunistically?

Is that a correct assumption?

Yes, Richard.

That's right.

As Barbara said, total inventories were up, but that was entirely [due to] pack-away.

That's great.

I know there's been an open job at dd's.

Wondering if there's a change in your thoughts about filling that job or just changing the reporting structure and operate without a president?

Can you comment on that?

No changes in how we're thinking about that.

We're still thinking about it in terms of replacing that position.

That said, the dd's business has been doing pretty well over the last couple of quarters.

We have a strong team in place, but no changes in terms of how we're thinking about the long-term leadership structure.

Okay.

And you'll call us when El Nino hits and you'll get it first on the West Coast, right?

So you'll just give us a heads up?

We will.

Thank you very much.

Kimberly Greenberger, Morgan Stanley.

(Laughter) I'm so sorry.

I had no idea you guys were going to become weather forecasters.

I loved Richard's comment.

Anyway, excellent quarter.

Nicely done.

Can you just remind us what the pack-away inventory was doing, how first quarter ended in terms of pack-away, what percentage of inventory?

In other words did you see a nice sequential acceleration in the second quarter in pack-away?

I'm wondering if you can tell if the goods you're getting were dislocated goods from the ports, or is it really quite difficult to tell actually how the goods are getting to you?

In terms of overall levels, Kimberly, they're very similar to where we ended the first quarter.

In terms of trying to understand where the goods came from, I would say at this point, it's really difficult to tell.

Department store business was difficult and so some goods are clearly coming from that market.

At this point, it's much more homogenized than the beginning when we saw huge amounts coming everywhere in every business from the port.

Barbara, do you think it's just, on the additional availability that you're seeing, it's just a function of a tough environment with vendors really trying to find a home for goods, just given the disappointing numbers we're seeing out of the department store space?

Is that your read on the situation?

At this point, yes.

Okay.

Great.

Thank you so much and good luck here in the second half.

Laura Champine, Cantor Fitzgerald.

This is Jason Smith on for Laura.

Thanks for taking my question.

I was just wondering if you can give us a sense as to how your competitor going down-market may impact you guys going forward?

What I would say about that is we're clearly operating in a very promotional and competitive environment.

And that's really true across the entire retail landscape, including our biggest competitor.

But our focus really is on our own business, so our top priority really remains providing the best compelling bargains possible to the customers and that's really not going to change so that's really what our focus is, how we feel about it.

Okay.

Great.

Thank you.

Anne-Charlotte Windal, Sanford Bernstein.

Congratulations.

Two questions if I may.

The first one, I was wondering if you had any update to share with us on the potential impact from the wage increases and your ability to absorb costs from that?

And my second question is one of your big competitors is talking a lot about the other strengths of their global sourcing capabilities.

I was wondering if you'd give us a little bit of an update on how global you are at this point from a sourcing standpoint.

[I know] thinking about your buying teams, where do you have active buying offices internationally?

Thank you.

On the first part of your question, wage increases, as we mentioned on the call in May, we've taken up our minimum entry-level wage to $9 an hour.

That adjustment, together with any offsets, is built into the earnings guidance for the rest of the year.

In terms of further increases, we think the labor market is fairly dynamic.

We like to follow the labor trends before making decisions on any future moves but in general we think as the economy improves over the next couple years, it's likely that there will be additional wage pressures out there.

And in terms of the global sourcing availability, we buy from a lot of different sources around the world so we feel that we have a wide assortment from a variety of countries and it's pretty widespread.

Thank you.

Matthew Boss, JPMorgan.

As we think about gross margins, can you walk through the drivers of the merchandise margin expansion this quarter?

And how should we think about the margin opportunity in the second half and on a multi-year basis from here?

Matthew, it's Michael Hartshorn.

In terms of merchandise margin for the quarter, it's actually a mix.

We continue to operate the business with a lower in-store inventory, which we said we ended the quarter at down slightly, down 1%.

So that helped drive faster turns and lower markdowns and it also included better buying, so a little bit on total margins.

In terms of margin on a multi-year basis, Matthew, as you know, we've taken a number of steps that have helped to drive margin over the last several years, in terms of very significant reductions to inventory, very significant improvements to shrink.

We'll keep chipping away at those, but on a go-forward basis, any improvement in EBIT margin is likely to come from ahead of plan sales.

Great.

Then just a quick follow-up.

On the uncertain retail landscape commentary, can this provide opportunity for your model or does a more promotional environment actually condense the value spread?

Just curious the puts and takes on some of the larger picture commentary and how it relates to your model?

It does a couple of things.

From the pricing and value perspective, it goes to our being prudent about how we plan the back half because as the department stores promote and they have a lot of inventory, the values move.

We chased our business back so we understand what's going on there and where our values need to be.

As it pertains to supply, when business is uncertain and difficult, it creates supply.

Any disruption in business creates supply.

You would think ultimately that there would be a bubble of goods that results from, let's say if back-to-school turns out to be more difficult than people anticipated, that there would be goods that are the results of that.

So you get it on both sides.

Great.

Best of luck.

Jeff Stein, Northcoast Research.

Just a quick question on your home performance.

Wondering how it performed relative to the rest of the store.

And then if you could distinguish between hard home and soft home?

Home performed above the chain average.

And actually both segments of home were good.

I would say the decorative piece was even better than the bed and bath piece.

Thank you.

Omar Saad, Evercore ISI.

Nice quarter.

Couple quick questions.

First, want to make sure I understood -- it sounded like part of the reasons behind your conservatism in the back half was it sounds like you're seeing a pretty fairly promotional environment out there.

I want to understand a little bit more what's driving that and why you think that affects your business or consider that it might affect your business?

Then I have one follow-up please.

Omar, really two key reasons to be -- three key reasons to be conservative in our outlook.

One is the multi-year comparisons that I mentioned.

Secondly, in our business, we can always chase good news.

We can always chase a good trend.

So it makes sense to manage conservatively so we keep expenses and inventory in check, and then obviously we can chase.

And then the third piece, which is what you're getting at, which is the outlook, a combination of things.

Mixed results and actually weak results among department stores causes us to think that the environment, which is already fairly promotional, will continue to be pretty promotional in the back half.

How that affects us is we're all about price differentiation.

The difference between value at Ross and the value elsewhere, and to the extent that other stores, department stores, et cetera, promote, that obviously eats into that price differentiation.

So that's what's built into the conservatism.

That's very helpful.

Then along a similar vein, if I look at your merch margin, it's been up 50 to 60 bps last couple of quarters and slowed a little bit this quarter, up 20 or 30 bps, but the pack-away percentage is still up year-over-year.

Is it the promotional environment that's causing that differential with the pack-away up?

I'd expect to still see some more merchandise margin gains, and like you were seeing the last couple quarters, or am I being too acute here, reading too much into it?

No, there was a differential in the first versus the second quarter.

In addition, entering 2015, we had lower clearance levels, so that actually helped us this year versus last year.

And our comp was a little higher, over plan in the first quarter versus the second quarter, so both of those factors resulted in more favorable margin in Q1 versus the second quarter.

Got you.

Thanks.

Jill Nelson, Johnson Rice.

Just given the energy crisis, what we're hearing about the oil and gas market, could you talk about maybe your performance in Texas and if you felt any pressure there?

Texas, overall, has consistently been a good performer for us.

In the second quarter and year-to-date, it's performed above the chain average for us.

So it continues to be one of our best performing regions.

Jill, we don't know whether that could be consumers are trading down from more expensive retailers in that region.

We don't really know what's driving that.

Okay.

And then I know you said dd's comp outperformed.

Could you just give a little bit more clarity on how this performance was in the second quarter?

Sure.

As Barbara mentioned in her remarks, dd's posted better than expected gains in sales and profits in the quarter.

That's actually been the pattern over the last several quarters.

We've been doing a number of things the last couple years at dd's to drive sales and actually to drive profitability, particularly more tightly controlling inventories and expenses.

So we feel good about how that's gone.

In terms of longer term, we're very confident in the dd's business model.

We just -- last year, we opened about 20 dd's stores and we are on track to do about the same.

So we're pretty happy with that business.

Appreciate it.

Thank you.

Stephen Grambling, Goldman Sachs.

One of the other differentials impacting gross margin was the step-up in the deleverage on the DC.

Can you give us a little better sense for how that line item should progress over the year and could you actually see some leverage as you move into next year and lap some of those costs?

Stephen, it's Michael Hartshorn.

Yes.

In the first quarter, we actually got a benefit in distribution, and we actually expect that to turn around in the back half.

Distribution centers are going to be impacted both by the pack-away-related timing costs and the fact that we just opened a new distribution center in Central Valley, California, during the second quarter.

As you move into next year, you'll still have a hangover from the additional DC in the first half of the year and then you should be able to leverage it in the back half.

Great.

That's it for me.

Thanks so much.

Bob Drubl, Nomura.

The question that I have is, as you progress throughout the second quarter and as you look at the fall, have you had to make price adjustments on any of your merchandise, given the competitive landscape that you're seeing out there?

No.

We haven't had to take price adjustments.

We chase a big part of our business as we go, which is one of the reasons why we run usually with a conservative plan so that we can watch the promotional activity and understand where we need to be in relation to department stores, as Michael said.

It's a value game, department stores to off-pricers.

And then -- thank you.

The second question that I have is, with pack-away being up, does it at all hinder your ability to buy very close to need or are you making the investment in inventory now?

Will that change the way you approach the business going forward or do you have complete flexibility around it?

It doesn't hinder anything.

We have complete flexibility around it.

Great.

Okay.

Thank you very much.

(Operator Instructions)

Patrick McKeever, MKM Partners.

On the wage increase, I don't know if you've quantified the impact on margins, what kind of headwind that amounted to in the quarter, but if -- to have -- would like to know that.

And then if not, maybe some broad parameters around the wage increase, percent of employees that got it, that sort of thing?

And how are you measuring the impact -- with Walmart, they're combining the wage increase with training and more flexible scheduling and some other things, just hoping to improve the in-store experience for customers.

So my thought is -- or my question is, what's the ultimate objective there with you?

Let me start with the last piece.

Our ultimate objective is to continue to attract and retain great associates.

We've been very pleased with our ability to do that over the last several years.

The reason to take up wage rates this year was to ensure that we could continue to do that going forward.

The impact on margin in the second quarter, there really wasn't one because we were able to find offsets in the business to neutralize the impact of the wage rate increase.

And in fact, we were able to do that for the back half of the year, too, so as a result, it really didn't have an impact overall.

In terms of more broadly, looking at how we manage our resources, our labor, our associates, we're always looking for ways to improve how we do that.

I'm not familiar with some of the examples that you just described, but we're always looking at other ways to improve both our customer experience and actually also our associate retention at Ross.

Okay.

Michael, then, you're saying for the back half of the year, it's going to continue to be more of a neutral factor as it relates to margins?

That's right.

It's in our guidance for the back half.

That's right.

Okay.

Great.

Thank you.

This concludes our Q&A session.

I now turn the call back over 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.

You may now disconnect.