羅斯百貨 (ROST) 2015 Q3 法說會逐字稿

Good afternoon, and welcome to the Ross Stores third-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-Qs and 8-Ks on file with the SEC.

Now I would 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 VP and Chief Financial Officer; and Connie Kao, Senior Director, Investor Relations.

We will begin our call today with a review of our third-quarter performance, followed by our outlook for the fourth quarter.

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

As noted in today's press release, we are pleased with the better-than-expected sales and earnings growth we achieved in the third quarter.

These results demonstrate that customers continue to respond positively to the wide assortments of fresh and exciting bargains we offer throughout our stores.

Earnings per share for the third quarter grew 15% to $0.53, on net earnings that rose 12% to $216 million.

Sales increased 7% to $2.783 billion, with comparable-store sales up 3% on top of last year's 4% gain.

For the first nine months of FY15, earnings per share grew 15% to $1.85, while net earnings rose 12% to $757 million.

Year-to-date sales increased 8% to $8.689 billion, with comparable-store sales up 4%.

dd's also posted better-than-expected gains in sales and profits for the quarter and year-to-date periods.

Men's was the strongest category at Ross during the quarter, while the Midwest was the top performing region.

Third-quarter operating margin increased 30 basis points to 12.1%.

These results were above plan, and primarily driven by higher merchandise margins.

As we ended the quarter, total consolidated inventories were up 14% over the prior year, with packaway levels at 48% of total inventories, compared to 42% last year.

Average in-store inventories at quarter end were down approximately 1% versus last year.

As planned, we completed our 2015 store opening program during the third quarter, with the addition of 19 Ross and 7 dd's DISCOUNTS locations for a grand total of 84 new stores this year, net of closures.

We expect to end FY15 with 1,274 Ross and 172 dd's DISCOUNTS stores.

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.

Let's start with our third-quarter results.

Our 3% comparable-store sales gain was driven by a combination of higher traffic and an increase in the size of the average basket.

As Barbara mentioned, third-quarter operating margin was better than planned, rising 30 basis points from last year to 12.1%.

Cost of goods sold declined 45 basis points, driven by a 45-basis-point increase in merchandise margins, and a 5-basis-point improvement each in freight and buying costs.

This was partially offset by a 10-basis-point increase in distribution expenses related to recent infrastructure investments that were partially offset by the favorable timing of packaway-related costs.

Selling, general and administrative expenses during the period increased by about 15 basis points due, in part, to higher wages.

During the quarter, we repurchased 3.6 million shares of common stock for a total purchase price of $179 million.

Year to date, we have bought back a total of 10.4 million shares for an aggregate price of $530 million.

We remain on track to repurchase a total of $700 million in common stock for the year under the two-year, $1.4 billion stock repurchase program approved by our Board of Directors in February of this year.

Let's turn now to our fourth-quarter guidance, which remains unchanged from what we communicated in August.

For the 13 weeks ending January 30, 2016, we continue to expect same-store sales to be flat to up 1%, on top of a strong 6% gain last year, with earnings per share projected to be $0.60 to $0.63 compared to $0.60 last year.

The operating statement assumptions for our fourth-quarter guidance include the following.

Total sales are forecast to grow 4% to 5% on the previously mentioned comparable-store sales forecast of flat to up 1%.

If sales perform in line with this guidance, operating margin is projected to be 12.6% to 12.8% versus 13.1% in the prior year.

The forecasted decline versus last year is mainly due to our expectation for higher distribution expenses from recent infrastructure investments and the timing of packaway-related costs.

Net interest expense is estimated to be about $5 million, our tax rate is planned at approximately 37% to 38%, and we expect average diluted shares outstanding to be about 403 million.

Based on this guidance, we now project earnings per share for the full year to be in the range of $2.45 to $2.48, up 11% to 12% over $2.21 in FY14.

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

Thank you, Michael.

As we enter the fourth quarter, we are pleased with our fresh and exciting assortments of name-brand bargains and gifts for this holiday season.

Despite outperforming our sales and earnings targets throughout 2015, there are a number of factors that still cause us to be cautious when forecasting the fourth quarter.

First, we are up against our toughest sales comparison of the year.

As Michael mentioned, comparable-store sales in last year's fourth quarter were up a robust 6%.

Second, there is ongoing uncertainty in the macroeconomic environment.

And third, based on the current retail landscape, we expect the upcoming holiday season to be highly promotional.

As a result, while we always hope to do better, we believe it is prudent to maintain a conservative posture.

Over the longer term, we remain confident about our prospects for respectable sales and earnings growth.

This is based on two key factors: our belief that off-price will remain a strong performing segment, especially given consumers' ongoing focus on value, and our own proven ability to offer our customers compelling bargains on an everyday basis.

This is, and always will be, the key to success in our business.

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

(Operator instructions)

Ike Boruchow, Wells Fargo.

Hi.

Good afternoon, everyone.

Congrats on a nice quarter.

I guess my question, I wanted to focus on the packaway number, 48% of inventory, it seems like that's the highest it's been in about two years give or take.

Just kind of curious your view of the environment the buying environment out there.

It sounds like a lot of vendors are canceling orders and the department stores aren't doing so well.

Just your view of the environment and your packaway strategy and how you look at that right now.

Well, the buying environment, we continue to see a really strong supply of excess goods in the marketplace.

As it pertains to packaway, packaway is typically the best bargains we carry on merchandise.

We go in the market, we see what's available, we see what the great deals are, and then we go in and we pack it away.

We don't focus so much on the number itself, Ike, as what we focus on is the value and the brands we can offer the customer.

Got it, thanks.

Congrats.

Thank you.

Paul Lejuez, Citi Research.

Hey, thanks, guys.

Could you maybe talk a little bit more, give us more detail on regional performance, specifically Texas and the oil-impacted markets?

Also curious, just higher level Ross versus dd's and then also the performance of those two within those Texas and other oil rich markets.

Thanks.

This is Michael Hartshorn.

The sales performance was fairly broad based across regions.

As we mentioned, the Midwest was the strongest region, which has been true over the past seven quarters.

California, our largest region, performed in line with the chain.

As far as Texas, Texas was in line with the chain average for the quarter.

(Multiple speakers)

On your question about dd's, as Barbara mentioned in her remarks, dd's posted better-than-expected sales and profits.

We don't typically break dd's out at a regional level, but overall we were very happy with dd's performance.

Got you.

Michael, you have had pretty positive things to say about dd's for several quarters now.

Are you at a point where you might feel more comfortable accelerating the growth of that concept beyond doing, let's say, in the low 20s per year?

Can that be accelerated as we think about next year?

I think it's unlikely.

As you say, for several years now we have been very happy with how dd's business has developed and we feel very good about the business over the longer term.

But we open, as you say, just over 20 stores a year at dd's.

The chain is now around about 170 stores, so 20 a year on a base of 170 is still a relatively large incremental addition every year.

We think it's likely that it will remain in that ballpark, 20 to 25 stores a year.

Got you.

Just to piggyback, one last one, off of Ike's question.

On the packaway merchandise, can you talk about the performance of that product that you've seen?

Let's say in this most recent quarter, is it meeting your sales and merch margin expectations?

That's it for me, thanks.

Packaway typically represents the best bargains we have.

We feel that in third quarter, this merchandise likely benefited sales and we expect it to help our sales in the fourth quarter as well.

Thanks, guys.

Good luck.

Thank you.

Kimberly Greenberger, Morgan Stanley.

Great, thank you.

My congratulations to a very fine quarter.

I just wanted to follow up quickly on Paul's question on packaway.

I think that packaway is probably a more broadly used term in Ross than maybe some of the other off-pricers.

Can you just confirm the composition of packaway?

Is it strictly goods that are shipped off and put into your packaway warehouse, or do you also consider packaway goods those that are sitting ready for current season distribution to stores that were maybe partially already distributed in the current season?

In other words, goods in a variety of distribution centers and not necessarily shipped off and stored for six months, so it's a bigger representation of the product that you've got held in your distribution center.

Does that make sense?

We are a little unclear.

Let me have a crack at it, Kimberly.

Packaway, we think of packaway as goods that aren't for sale.

They are packed away in our warehouses to be released for sale in subsequent months, or even next season.

I don't know if that helps.

Does that answer your question?

It does.

Are there examples where you actually have a current season order, you partially distribute, let's say, 70% of the goods to existing stores, hold back 30% in your distribution center, as an example, and then use that to fill in based on sales trends?

Would you consider that 30% that you hold back part of your packaway or would that be just inventory in the distribution center that you would not put in your packaway -- in your packaway calculation?

As long as they haven't been released for sale, we treat it as packaway.

Once it's released for sale, then it counts as part of our selling store inventory.

(Multiple speakers)

Sorry, Michael, go ahead.

I was just going to make the point that I guess in Barbara's remarks, she broke out total inventory.

The way to think about it is our total inventories are up 14%.

Our selling store inventory, the inventory that is actually in the store for sale was down slightly.

Obviously, that's a key metric for us, because with a 3% comp and with in-store inventory down slightly, that means we are achieving positive turns and better merchandise margin.

Okay, great.

If I think about your total inventory bucket, there's a piece of it that's in-store, and the other piece of it that's packaway.

Is there a third bucket of inventory that would be neither considered in-store or packaway that you would classify?

Yes, Kimberly.

There is a couple of buckets.

You mentioned there is packaway inventory, there is in-store inventory, and there is also in-transit inventory on the way to the distribution center.

As we mentioned, total inventory was up 14% and packaway was up at 48% of total inventories.

In-transit inventory for us was actually down versus last year because we are up against the start of our mitigation efforts because of the slowdown in the port.

Those are the primary three buckets.

Okay.

Anything that is in your distribution center that is not available for sale would be included in the packaway bucket?

That's right.

Anything else in our distribution center is on its way.

It's being processed.

It's on its way out the door and therefore would not count as packaway.

Okay.

Great.

As I think about the wage increase, this is the first quarter really where we've had any -- this was the first full quarter, I think, of the wage increase.

I think you said in your prepared remarks of the 15 basis points increase in SG&A, it was largely driven by wages.

Michael, I'm wondering if you could just give us -- was it the majority, was it the full piece, and were there any other moving parts in the SG&A?

The primary difference, and the reason we call out wages, is we typically we'd say 3% is our leverage point.

As you know, there's always timing differences from quarter to quarter.

A part of that deleverage was due to wages and there were some other timing differences that were not as meaningful.

Longer term, we still believe that we think we can leverage at the 3% comp point.

Would that be your expectation in 2016 as well, just given the wage increases that we have going through that, I guess, of a 3% comp you would be able to leverage?

Yes, I mean it's a good question.

We are obviously in the midst of our budget cycle today and we would expect to provide some more color on the fourth-quarter call.

As we previously mentioned, we took our minimum wage up to $9 across the chain this year and those adjustments, along with any offsets, are included in our guidance this year for 11% to 12% EPS growth.

We do view the labor markets as dynamic.

We think as the economy improves over the next couple years, there will be additional wage pressure out there.

But like this year, we will do our work and where we can, we will find efficiencies throughout our business to attempt to mitigate the impact of any cost pressures we have in our business.

Do you think there is a possibility that part of your traffic increase is actually that some of the consumers who shop at Ross stores are seeing the benefit of some of those wage increases, or is it very difficult for you to sort of draw that loop and come to that conclusion?

It's the latter, Kimberly.

Conceptually, we think if the customer has more money in their pockets, that's a good thing for us but it's very hard for us to dissect that and split it out in terms of to what degree that's driving our comp.

Understood.

Great quarter and good luck here for the holiday.

Thank you.

Michael Binetti, UBS

Hey, guys.

Congrats on a great quarter.

As you look ahead to 2016, you said you think you can hold the 3% leverage point.

There's obviously the well-documented labor inflation that you guys are already starting to get into.

We'll have a full of that next year, maybe some more.

Do you have merchandise margin room on your side to offset that margin compression next year?

How should we think about margin compression -- I'm sorry, merchandise margin as one of the levers that you have to toggle next year?

I think at this point, Michael, we will be in a better position to answer questions on 2016 in our fourth-quarter call.

Okay.

Maybe then as we just kind of ask something about the competitive backdrop here.

I think you mentioned it.

It looks like it's stepping up to be a very promotional holiday here, very competitive.

As you look at the environment, you're clearly gaining share of traffic.

Certainly with the industry backdrop, it would seem a strong value message would continue to drive those share gains in the fourth quarter and into the medium term.

What do you think is the right thing to do with IMU or with starting prices?

Do think it's a good idea to say strategically maybe even dig a little deeper on value at this point?

Or do you think the merch margin is maybe where you'd prefer to see some of the flow-through come from?

Michael, I do not think we will get into that level of detail in terms of how we go after the business.

Suffice to say that we agree with you.

We think what's really driving the retail environment right now is that the customer is looking for value.

Our focus is to provide the best value we can, put the best bargains in front of the customer, and that's what will drive the business.

Thanks a lot guys.

Congrats.

Thank you.

Laura Champine, Cantor Fitzgerald.

Good afternoon.

I was just wondering if you could comment on strength in categories.

Was home stronger than apparel?

Any particular strength in women's versus men's?

Anything you can say there on category strength?

In terms of merchandise performance, home and apparel were fairly, were both in line with the chain overall.

Frankly, the only other call out we would say is what we said in the comments was men's was our strongest performance -- merchandise category.

Thank you.

Thank you.

Oliver Chen, Cowen and Company

Hi.

Congrats on really great, solid results.

The merch margins were really impressive.

Could you just elaborate on the main driver?

Is it -- I think it probably has something to do with your low level of in-store inventories and mark-down levels.

The in-store inventory level was also very impressive.

Are you expecting that to kind of continue to be negative?

I'm just curious about how that will trend, just because the momentum's been so strong at your comp line.

Sure, Oliver.

We outperformed the high end of our comp sales target during the quarter.

That meant that we had faster inventory turns, resulting in lower mark downs.

That was also helped by the fact that we ran with inventories down about 1% during the quarter.

We also benefited from our ability to take advantage of buying opportunities in the marketplace and in addition, we did see some benefit from ongoing improvements in our inventory shortage.

We typically take our physical inventory in the third quarter, so all of those contributed to the better-than-planned merchandise margin during the quarter.

Thank you.

In-store inventories for the fourth quarter, we are again planning them to be down during the quarter, so that should answer the question.

You've got something ahead of the curve with looking about the marketplace and the environment that's happening.

Were August, September, October, kind of steady in cadences or was there a fair degree of volatility that you were seeing in the way the consumer is behaving?

For us, relatively steady throughout the quarter.

Okay.

Our last question was the comp looked nicely driven by this healthy composition between traffic and basket.

What's happening with basket that's enabling you to have that momentum?

Is that kind of the balancing that you think will continue as you look forward on a medium- and longer-term basis between traffic and both basket?

Oliver, as you mentioned, the 3% comp was driven by both higher traffic and an increase in the size of the average basket.

The higher basket was a combination of higher units per transaction and also a higher AUR.

For us, the way that we view that is that we have been successful delivering great bargains to the customer and that's the way we think about it.

We don't look at the composition when we are planning our comps.

Okay, best regards.

Happy holidays, thanks.

David Mann, Johnson Rice.

Yes, thank you.

Great job.

I'm not sure if you've pointed this out, but merch margin expectation within your fourth-quarter guidance, how should we think about that?

I think at this point, David, if we perform ahead of plan like we did in third quarter, I think our expectations would be that it's up a bit over last year.

Okay.

Then in terms of the packaway impact on distribution costs, I think you suggested there was a benefit in the third quarter.

How much, how many basis points would that have been?

We didn't call it out separately.

We did call out, obviously, the DCs.

We said DCs were going to be a drag on the back half with the Central Valley DC of about 30 basis points but we didn't call out the packaway piece.

In terms of what you're thinking about in the fourth quarter in your guidance, about the packaway impact on the distribution costs, how should we think about that?

Are you assuming packaway normalizes to some extent?

Yes, so our guidance -- it's a good question.

Our guidance assumes that it does normalize by year end.

We said overall operating margins were going to be down 30 to 50 basis points, primarily driven by three things.

One, the comp at flat to 1%, plus DC costs that would delever because of the infrastructure investments and the timing of packaway.

Could you quantify how much that timing of packaway was?

Would you be willing to do that?

No, we didn't call that out.

And then last question.

On the home side of the business, I know you been making great strides there, with some outperformance in some of the recent quarters.

I guess this quarter was more in line, or at least two of the last -- or three of the last four quarters, I think that was the case.

Are you at a point now where you think that some of the benefits there have more stabilized, or do you still think there is some opportunities to drive some outperformance?

We still feel good about home.

We feel like we're well-positioned for holiday and for the fourth quarter and we feel that in the future 2016, 2017, there is still room to grow there.

Thank you very much.

Lorraine Hutchinson, Bank of America.

Thank you, good afternoon.

I wanted to follow up on the higher AUR during the quarter.

Is there a mix shift happening there, or what's driving the tickets higher?

Hi, Lorraine, it's Michael.

Really, two things.

One, because we operated with less inventory it means we had less clearance, so that drives, of course, a portion of the AUR increase, and there's always mixes by business that contribute.

Can you quantify the shortage benefit from the third quarter?

Of the 45 basis point improvement last year, it's about a third of it.

A little less than a third.

Thank you.

Brian Tunick, Royal Bank of Canada.

Thanks.

I'll add my congrats as well.

I guess first question was on the category side.

Did you guys say men's was your strongest category?

I don't think I've heard that in quite some time.

Is there any context you can put around that?

Is that because the either junior's or women's is slowing?

Just curious what you are reading into that.

Was that great buys or something like that?

And then maybe some more context on the Midwest stores.

I know they continue to lead the chain here.

Is that how the new store maturity curve is playing out?

Is that the micro merchandising?

What are you learning from that as you think about your next markets, and when could we hear about a new market in the next year or two?

Thanks very much.

Brian, as it pertains to men's, for years we had difficult business in men's, but over the last couple of years we continued really just to improve our execution.

We are just literally doing a better job than we had done before.

Our men's business, we feel pretty good about.

Brian, on your question about the Midwest, yes, we are very happy with performance in the Midwest.

I think that Michael Hartshorn had mentioned earlier that for the past seven quarters now the Midwest has been one of our top-performing regions.

When we entered the Midwest just over three years ago, we said that we expected it to be a very successful business over time, and we're certainly pleased with the progress that we have made so far and that reinforces our confidence in the region.

In terms of additional new markets, I mean the Midwest, as you will appreciate, is a pretty big area.

There are lots of individual markets within the Midwest.

Our focus right now and probably for the next few years is going to be to build out our presence in those markets.

All right, thanks very much and good luck for holiday.

Thank you.

Bob Drbul, Nomura.

Good afternoon.

Just a couple of quick questions.

The first one is, during the quarter, the environment in terms of the promotional level of activity from the competition, did you see any changes then as the quarter progressed?

I guess you didn't really change at all the fourth quarter prospects in terms of your guidance or your plans, so my question is, has the environment at all given you the thoughts around changing it in terms of the pricing umbrella from department stores probably being a little bit more promotional as you think about your prospects for the fourth quarter?

I'll handle the second piece of your question there, Bob, on the fourth quarter.

I think as Barbara had outlined in her remarks, we think it makes sense to be relatively conservative in the fourth quarter in the ongoing economic uncertainty.

Secondly, the environment looks like it will be fairly promotional.

Some of that is based upon just what we are seeing in terms of the recent reports in department stores.

Those reports we have to think this could be a very promotional fourth quarter.

The final point, but perhaps the most important, is that we're up against a 6% comp.

Last fourth quarter, we reported really a terrific 6% comp.

We're up against that number.

The other point I'd make is in our business, we typically plan our business relatively conservatively.

That's kind of probably the first bullet point in our play list.

We do plan the business conservatively and then we know we can chase the business if the sales are there.

We think it's best to plan conservatively, but then hope to do better.

Great.

And as it pertains to the --

Go ahead, sorry.

Just as it pertains to the promotional level during the quarter, it actually was pretty promotional during the entire quarter.

It felt like there were a couple of events that department stores added in October but actually quite frankly, it's been promotional since Q2 and just came across through back-to-school, and then increased, I would say, slightly in October.

In terms of categories, can you just talk about how your cold weather categories are performing and how you're positioned there?

If you could just give us an update in terms of what you are seeing from the business in terms of the handbags and accessories categories?

Cold weather is been, I would say, difficult.

I mean, it was difficult in October.

We have relatively conservative plans in cold weather.

We've chased part of that business at the back-end of seasons, so we can adjust as we come along the way.

It did start out slower than we would've liked.

In terms of handbags and accessories, the business is still behind the chain's performance and we're still working our way through that.

Thank you very much.

Good luck.

Thank you.

Marni Shapiro, The Retail Tracker.

Hi guys, congratulations.

Just a question on dd's.

Has Michael been running dd's all of this time, and will he stay on board to transition Brian in the role and for how long will he stay on board?

Are there any other leadership positions open at dd's that you need to fill at this point?

Michael -- dd's, yes, dd's has reported to Michael for this period of time.

Michael will -- Brian will report directly to me.

Michael will be involved, heavily involved, in this transition of Brian into the Company.

There are no other senior management jobs open at dd's at this point.

That's fantastic.

On the traffic side, have you guys seen traffic still increase or flat at Ross and dd's?

They are up in both during the quarter.

Fantastic.

Best luck for the holidays, guys.

Mike Baker, Deutsche Bank.

Thanks.

I'm just curious, the department stores, it seemed like they got really hit with a lot of heavy inventory because it got warm.

It seems like they're worse off now than they thought they were three months ago, yet you haven't changed your guidance.

Did you predict, correctly predict, how bad it would be for the department stores?

Is there some other reason why you wouldn't change your guidance?

Are you just doing that much better?

I guess related to that, inventories are high, just as high as they are now, at the end of the previous quarter, yet your margin is getting better, not worse.

So just curious how you are bucking the trend and why that wouldn't be the same in the fourth quarter.

Let me answer the first part of your question, Mike, about department stores.

When we think about our guidance for the quarter, a lot of factors go into it.

Obviously, our own performance in the third quarter, the outlook for the fourth quarter, the macro economy, how promotional we think it's going to be, and I would say as we look at this fourth quarter, the fact that we are up against a 6% comp.

So all those things go into the mixer for us to come up with guidance for the fourth quarter.

I think that's how I'd answer your first question.

I don't think I really understood your second question about inventories.

Could you just repeat that?

Yes, a lot of the concerns is that inventories are high right now and that leads for a promotional environment and that might hurt your margins in the fourth quarter.

That makes sense, except I'd just point out that inventories were high at the end of the second quarter and they were also pretty high into the first quarter.

I think if you do the average department store inventories at the end of the first, second, and third quarter, it's up about 5% or 6% pretty consistently.

Yet even with the high inventories throughout the year, your merchandise margins are getting better not worse.

Is there a reason to expect that, that wouldn't continue into the fourth quarter?

Yes, I think it's not all about inventories.

I think it's a combination of inventories and sales trend.

And at least what we've seen, and you've seen the same numbers, the data we've seen suggests that actually the sales trend hasn't lived up to people's expectation.

Although the inventory levels may not move that much from quarter to quarter, the sales trend has deteriorated and that's what could drive it to be more promotional in the fourth quarter.

Okay, that's helpful.

If I could ask one more sort of longer-term question.

You guys always guide -- are we stuck here at a 1% to 2% comp?

I can't remember the last time you actually comped at something in that range.

As I do my model out, is it probably more correct to think about your annual growth as something higher than that typical guidance, probably in the 3% to 4% range?

How do you guys really think about it longer term?

I think we've described our longer-term model as we believe that our long-term average comp should be in the region of 3%.

We feel pretty comfortable about our ability to achieve that kind of comp number.

Certainly if you look at the last 10, and even further back, 15 years, the data would suggest that, that's a reasonable expectation.

Now with any given year, it could be plus or minus one or two points in either direction, depending upon the circumstances, the economic environment, the competitive environment, the comps we're up against, et cetera.

But I think if you are modeling 3% on an average basis, I think that's appropriate.

Okay, makes sense.

One more, I promise.

How does this work?

When inventories are high in the environment right now, are you more likely to get the excess product from vendors, because they are getting inventory pushed back to them, or they are not able to send it to the department stores, or are more likely to get it directly from the department stores?

In other words, department stores have already taken possession of it, but now they're going to send it to you?

We actually buy the merchandise from vendors direct.

Okay, understood.

Thank you.

Thank you.

Anne-Charlotte Windal, Bernstein.

Hi.

Good afternoon and congratulations.

This may be a moot point given the availability of goods on the market, but with competition increasing in the off-price space, are you seeing any change in the competition dynamics?

Are you seeing any of your competitors becoming more aggressive in terms of what they are willing to pay for some brands?

Anne-Charlotte, not really, no.

The new competition that I think you are referring to, frankly is just too small to really have any kind of impact.

So, no.

Okay, just had to ask.

Thank you.

Neely Tamminga, Piper Jaffray.

Great, thank you.

Barbara, I just wanted to follow back up on the appointment of Brian Morrow for the Company.

Coming from Stein Mart, obviously there's more of a national brand presence that exists in that format relative to what dd's currently has.

Should we be reading into something around that in his chief merchandising experience?

I would imagine anybody -- at this point, you've got your pick of the litter.

Who wouldn't want to come work for Ross, right?

What specifically have seen in Brian that's going to be very specific and relevant for dd's?

Thank you.

Brian has a very deep, broad-based experience.

He has over 30 years of experience in a variety of sectors, including moderate department stores and most recently off-price retail.

This experience, along with his strong leadership skills, we think he's really going to be really valuable resource for dd's.

Worrying about whether he can make the transition to our low to moderate customer, we don't foresee that as any problem.

We think is a very good merchant and a good merchant can merchandise all areas.

Thank you.

Thank you.

Matthew Boss, JPMorgan.

Hi, congrats on a nice quarter.

As we think about your square footage expansion profile from here, first, how are you more recent stores performing?

And then second, what's the best way to think about how many years left in the existing markets in the Midwest, versus how we best should think about timeline for a Northeast entrance?

Matthew, in terms of new stores, I would say that we have been very happy with the performance of our new stores actually over the last several years and this year has been no exception.

We have been happy with how they have performed.

Certainly, this year, actually I'd say for the last few years have exceeded our initial sales plan.

In terms of a timeframe for new markets, I wouldn't give you a timeframe at this point.

I think that we have plenty of opportunity left in, frankly, in our existing markets as well as in the Midwest.

So I think that's going to keep us busy, certainly for the next few years.

Okay, great.

And then just a follow-up.

I mean, you guys have been spot on with your call in the retail environments.

In terms of the product availability that you're seeing, are there any particular categories of particular opportunity as it relates to some of the buys that you see coming in the pipeline?

Actually, the supply is very broad based.

It's a great time to be a buyer.

Great.

We will leave it with that.

Sounds like it.

Best of luck.

Thank you.

Roxanne Meyer, MKM Partners.

Great, thanks, and let me add my congratulations on a really strong quarter.

My first question is a follow-up on inventory.

I guess I want to appreciate, what are your guard rails around inventory in terms of how high you are willing to grow inventory on an absolute basis relative to your sales plans?

Does that have a limit?

How do you think about your inventory strategy in total?

Roxanne, I think we think -- I know we think about our inventory on a segmented basis.

We think about in-store inventory, which is really the inventory that's available in front of the customer.

We manage that very tightly.

As we've talked about earlier on in the call, over the third quarter, that showed a slight decline versus last year and that's what we look for.

We look for some ability to drive turns and therefore drive mark-down improvement and margin improvement.

That's how we think about the in-store piece of inventory.

Separately, we think about packaway based upon what's available in the marketplace.

If we see terrific opportunities in the marketplace, our merchants are encouraged to take advantage of those and that means packing away those goods.

If packaway rises over a period of time, that's because we've seen great bargains in the marketplace that we like.

That's kind of how we think about inventory, the different buckets of inventory.

Okay.

The buyers just have the ability to take advantage of deals in the market and it doesn't seem like there's too many constraints around at some point you just have to get cut off, that you're willing to extend yourself knowing that it's for future periods?

The buyers have plans.

It's not just a free for all, they are out there buying.

There is a strategy, there is a plan, there is a plan by business segment of how much we think is appropriate.

All that being said, one of the benefits of our model is that we are flexible.

If we were to see a large amount of product in a classification, or a business we weren't planning on particularly driving, and that product could help us drive the business, we would put money into that plan and we would flex.

That's one of the benefits of being in the off-price business.

One other point on that, Roxanne, is we do, as you would expect, we have significant controls over what is in packaway.

So we control very carefully so that the aging of packaway, how long it's allowed to stay in there, what kind of goods.

We manage all aspects of that, as you'd expect.

Okay, great.

And then just curious on the traffic increases that you are seeing.

Can you talk about what portion of the traffic is coming from new versus repeat buyers, are they continuing to skew younger, are existing customers shopping more?

Some of the demographics behind it would be great.

Thanks a lot.

The new customers that we've attracted, frankly, over the last several years, demographically they look a lot like our existing customers.

What they all have in common is they are all looking for great value, for great bargains.

In terms of, your point about the age, we have always disproportionately attracted slightly younger customers and that continues to be true.

When you look at the growth of our junior's business over time, that's a good manifestation of that.

But as I say, I would say that the demographic of our new customers are pretty similar to the demographics of our existing customers.

Okay, great.

Thanks and best of luck for holiday.

Jeff Stein, Northcoast Research.

Barbara, this was the first quarter that I could remember that you did not call out junior's as the best, or one of the best, performing categories.

And I'm just curious, anything notable around that?

Is that customer spending less or suddenly men's just exploded during the quarter?

Junior's performed slightly above the chain, and it was up against a very tough compare.

With that, we had a couple of execution issues, which we have corrected.

What would execution mean?

Would it be merchandising, or --

Wrong timing on some products.

Okay.

Real estate costs, what's going on there?

It's one thing to compete against other companies for merchandise.

I'm sure there's plenty of that.

There's less availability when it comes to real estate.

Are you seeing real estate costs go up and perhaps choice locations becoming more difficult to identify?

I think we're pretty happy with the availability of the real estate locations and the range that we're seeing.

There is a lot going on in the retail industry, not just in apparel retail but in other sectors, office supplies, electronics, et cetera.

Which means that there is availability of real estate and we have a terrific real estate team who over the years have been able to secure great locations for us a great deal.

We're pretty happy with the outlook there.

Okay, and one more really quickly for Barbara.

During a period where you've got a lot of promotional activity going on and there is an overabundance of product, is there a chance or a risk that packaway may not prove to be as great of value because perhaps you bought it six month ago at a higher price and today you could re-buy it at a much lower price?

We actually -- Michael talked about all of the different metrics we have to measure packaway.

We actually constantly look at the values that we have in there.

Now, the merchants when they put merchandise in packaway, they are thinking of it from a promotional perspective.

The packaway that we own today would have been packaway we would have bought end of Q2, into Q3, when we were already seeing the promotional environment coming across.

So they know when they put in there that there has to be a variance to what's going on in the world.

All that being said, if there was something in packaway that we didn't think was the right value, during our processes we would capture that and there's a lot of sides, a lot sides, around packaway and what's in there.

We would put it out and we would mark it down and we would move on.

Really, the headset for merchants to put something in packaway is, they have to feel comfortable that when they take it out it really is going to be a great branded bargain.

So there's a lot of sides and rules and questions around what that looks like before they put it into packaway.

Got it.

Thank you very much.

Thank you.

Richard Jaffe, Stifel.

Thanks very much, and one more question on packaway, please.

How long does something stay in packaway?

What's the average life of its time in packaway, ballpark or some time frame?

Richard, it's about three to four months.

Three to four months, that's great.

I assume you're going to be in position to take advantage of what looks like a tremendous amount of product in the marketplace as again, I assume cancellations are out there.

I'm sorry.

We are in a good position going into what we call a volatile climate, so we feel pretty comfortable with where we are.

I think volatile may be a kind word, going one way, unfortunately.

Thanks very much.

Stephen Grambling, Goldman Sachs.

Hi, thanks.

I had one quick follow-up which I guess, just on the cost efficiencies that you captured this year.

Can you talk to some of the biggest buckets there and maybe what is still left?

Stephen, it's Michael.

I mean, we are looking everywhere.

We are looking at non-payroll, payroll, we are looking for efficiencies throughout the business.

I think we will continue to do that.

We're doing that in our budget process and we will be able to give you an update at the end of the year.

I'll shoot one more in there, which is just there has been some investor concern around one of your larger off-price competitors going after lower AURs.

Clearly, the overall comp hasn't reflected any impact.

Can you just remind us if you have seen any difference in comps by proximity to off-price peers?

Yes, Stephen, we always slice and dice our business.

We look at how different stores are doing based upon characteristics like demographics, co-tenants, et cetera.

Frankly, there's nothing to call out there.

It's been broad-based.

There's been nothing there that really impacts us.

Fantastic, best of luck.

Thank you.

David Glick, Buckingham.

Thank you.

Most of my questions have been answered.

I just wanted to follow up again on the Midwest.

Obviously, that's a newer market for you.

For most retailers, it was the most challenging region because of very warm weather.

I was just wondering if you could help me understand how you could outperform in that market?

Obviously, when you turn your inventories faster you're less reliant on seasonals, which gives you guys an advantage versus department stores.

Just a little more color on that, help me understand that would be great.

Thanks.

David, I would say that what always drives our business as a chain, and actually regionally, is having great product in the stores.

I think we feel very good about the assortments that we have in our Midwest stores, and ultimately that's really what's driven our business there over the past couple of years.

Great, thanks very much.

Good luck.

Thank you.

There are no further questions.

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

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.