羅斯百貨 (ROST) 2015 Q4 法說會逐字稿

Good afternoon, and welcome to the Ross Stores' fourth-quarter and FY15 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 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, in the Company's FY14 Form 10-K, FY15 Form 10-Qs and 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, Group Senior Vice President and Chief Financial Officer; and Connie Kao, Senior Director, Investor Relations.

We'll begin our call today with a review of our fourth-quarter and 2015 performance, followed by our outlook for 2016.

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

As noted in today's press release, we are pleased with our sales and earnings results for the fourth quarter, which exceeded our expectations, despite the highly-promotional holiday selling environment.

Additionally, we faced our most challenging sales comparisons from the prior year.

Our results were driven by the competitive values we offered on a wide assortment of name brand bargains and gifts throughout our stores.

Earnings per share for the fourth quarter grew 10% to $0.66 on net earnings that rose 6% to $264 million.

Sales for the quarter increased 7% to $3.251 billion, with comparable store sales up 4%, on top of last year's 6% gain.

For FY15, earnings per share grew 14% to $2.51, on top of strong multi-year increases.

Net earnings rose 10% to $1.021 billion with comparable sales up 4% for the year.

dd's DISCOUNTS also posted better than expected gains in sales and operating profits for both the quarter and year, as customers continued to respond positively to their value offering.

Misses Sportswear was the best-performing merchandise category at Ross for the fourth quarter, while the Midwest was the strongest region.

Our fourth-quarter operating margin of 12.7% was down from last year, as improved merchandise margins and strong expense control were more than offset by the timing of packaway-related costs.

For the full year, however, we are pleased that operating margin increased 10 basis points to a record 13.6%.

As we ended 2015, total consolidated inventories were up 3% over the prior year, with packaway levels at 47% of total inventories, compared to 45% last year.

Average in-store inventories were down approximately 2% at year-end.

During the fourth quarter, we repurchased 3.2 million shares of common stock for a total price of $170 million.

For the full year, we repurchased 13.7 million shares, for an aggregate price of $700 million.

We expect to complete the $700 million remaining under our current two-year, $1.4 billion program by the end of FY16.

As noted in today's release, our Board recently approved an increase in our quarterly cash dividend to $0.135 per share, up 15%, on top of an 18% increase last year.

The continued growth of our shareholder payouts reflects our ongoing confidence in the Company's ability to generate significant amounts of cash, after funding our growth, and the other capital needs of our business.

We have repurchased stock as planned every year since 1993, and raised our cash dividend annually since its inception in 1994.

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

Now Michael Hartshorn will provide further color on our 2015 results and details on our FY16 full-year and first-quarter guidance.

Thank you, Barbara.

Let's start with our fourth-quarter results.

Our 4% 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, while full-year operating margin was up 10 basis points compared to last year, fourth-quarter operating margin declined 45 basis points to 12.7%.

Cost of goods sold increased 75 basis points in the quarter, driven by 100 basis points of higher distribution expenses, due to the timing of packaway-related costs that benefited earnings earlier in the year.

Freight and buying expenses also rose 15 and 5 basis points respectively.

These increases were partially offset by merchandise margin improvement of 35 basis points from the prior year, and 10 basis points of lower occupancy costs.

Selling, general and administrative expenses during the period improved by 30 basis points, benefiting from strong cost control, and leverage on the 4% comparable store sales increase.

Our tax rate for the quarter was lower than expected, due to the passage of federal tax credit legislation, and also the favorable resolution of a state tax matter.

Let's turn now to our guidance for the upcoming quarter and year.

Earnings per share for FY16 are forecast to be in the range of $2.59 to $2.71, up 3% to 8% from $2.51 in FY15.

The operating statement assumptions for FY16 include the following: Total sales are forecast to grow 4% to 5% on a comparable store sales increase of 1% to 2%.

We expect 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.

If same-store sales are in line with our guidance of up 1% to 2%, then we would project operating margin for 2016 to be 13.5% to 13.7%.

This forecast calls for a slight increase in merchandise margin that would offset some deleveraging on operating costs.

Net interest expense is estimated to be $17 million.

Our tax rate is projected to be approximately 37% to 38%.

We expect average diluted shares outstanding to be about 395 million.

Capital expenditures in 2016 are projected to be approximately $425 million.

And depreciation and amortization expense, inclusive of stock-based amortization, is forecast to be about $385 million, up from $346 million in 2015.

Lastly, our guidance includes our plans to raise the minimum wage for eligible hourly associates to $10 per hour in the second quarter of 2016, up from the current $9 minimum.

These wage adjustments will help keep us competitive in our hiring practices, and enhance our ability to retain talented associates to provide the shopping experience our customers have come to expect.

Let's move now to our first-quarter guidance.

We are projecting same-store sales to be up 1% to 2% and earnings per share to be flat to up 4% at $0.69 to $0.72.

Following are the assumptions that support this range: Total sales are projected to increase 4% to 5%.

We expect to open 22 new Ross and six dd's DISCOUNTS locations during the quarter.

First-quarter operating margin is projected to be 15.0% to 15.2%, compared to last year's 15.7%.

The forecasted decline is mainly from the timing of packaway-related costs that benefited the first quarter last year, and also the impact of a new distribution center that opened in the second quarter of 2015.

In addition, net interest expense for the quarter is estimated to be about $4.5 million.

Our tax rate is expected to be approximately 38% to 39%, and weighted average diluted shares outstanding are projected to be around 400 million.

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

Thank you, Michael.

We are very pleased with our strong performance in 2015, as we were once again able to convert our better-than-expected revenue gains into solid double-digit earnings per share growth.

These results are due to the resilience of our off-price business model, and are a testament to the talented people we have throughout our organization.

They have demonstrated once again their ability to deliver compelling bargains to our customers, which will always be the key to success in our business.

As we move into 2016, we are well-positioned to take advantage of the best opportunities in the marketplace; however, we continue to face our own challenging multi-year sales and earnings comparisons.

And with the increasing uncertain and volatile macroeconomic climate, it doesn't appear that the retail landscape will get any less competitive or promotional in 2016.

So while we hope to do better, we believe it's prudent to maintain a conservative posture when forecasting our business for this year.

As we look ahead over the longer term, we remain confident in our ability to deliver average annual earnings per share gains in the low double-digit percentage range.

This view is rooted in our belief that the off-price sector will remain a strong performing segment of retail, especially given consumers' ongoing focus on value.

Equally important is our proven ability over time to maximize our favorable industry position by delivering the exceptional values our customers have come to expect.

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

(Operator Instructions)

Your first question comes from the line of Michael Binetti from UBS.

Your line is open.

Congrats on a good quarter.

Would you help us think about the timing shift that you pointed to with the merch margins up, and the packaway taking away a little bit of that merch margin upside that we saw, and how to think about those dynamics as we roll forward at least into the first half of 2016, please?

Yes, so as we mentioned on the call, Michael, it's Michael Hartshorn, for the quarter it impacted us by about 100 basis points, and to walk through that timing of what happened during the year, Q1, we got about a $0.03 benefit last year.

Q3, we got about a $0.01 and then Q4 went $0.05 with a charge to earnings.

So as we think about it going forward in the first quarter, as we called out in our guidance, we expect some headwind in the first quarter.

It's hard to predict how it will fall out during the rest of the year, and that's based on market availability of merchandise.

Right.

And it sounds like you're pleased with the inventory available in the channel in the quarter, as you head into the first half of the year.

I'm trying to think about areas where perhaps that we'll see -- as we walk around the stores here in the first quarter, what are some of the areas that we're going to see, that you found to be more readily available perhaps than you thought, as we get into the year?

Actually, I think the availability, Michael, is pretty broad-based.

It's really -- when you think about the sectors of the market where business is difficult, it's apparel and it's home.

So we feel that there are opportunities in all businesses.

Okay.

If I could sneak in one final one.

Obviously, we get a lot of questions about new entrants coming into off-price.

Everyone seems focused on getting their fair share of the growth that you talked about and the optimism you have in the category longer term.

In the markets where you have seen a rising count of competitors that fall somehow under the off-price umbrella, would you mind talking about sales dynamics, or the competitive dynamics that you've seen in those markets?

Thank you.

Sure.

So Michael, it's Michael O'Sullivan.

We really haven't seen any impact at this point.

If you think about the size of some of those new off-price entrants, that's not too surprising, they're just too small to have made much of an impact.

I'd say more broadly, we try not to get too distracted by what other companies are doing and what new entrants are coming into the market.

We operate in a very competitive marketplace and we try and focus on what we're good at, and to make the best use of the advantages and strengths that we have.

As we look at the fourth quarter, the 4% comp on top of the 6% comp last year, suggests that we're doing pretty well in that regard.

Thanks a lot.

Your next question comes from the line of Omar Saad from Evercore ISI.

Your line is open.

Great quarter.

I was wondering if you could -- you mentioned the promotional environment a few times in your prepared remarks.

I was wondering if you could elaborate on that a little bit.

Are you seeing any impact on your customers or the marketplace, given the broader, more promotional environment in the quarter?

Obviously, a really good comp, merchandise margins up.

But you how do you see that impacting the business, or what are you concerned about how that might affect how consumers behave, your customers behave in 2016?

Thanks.

I think the increased promotional environment, I think what we saw in the fourth quarter, especially in the department store sector, is what we're going to see as we continue through 2016.

I think what it means for the customer, it means for us, obviously we're not economists, so we can't determine what the customer is thinking but I think what it means to us in our business is that we need to continue to deliver great value.

Value is something that moves, based off of what goes on in department stores and specialty stores, so we need to make sure that we do two things.

That we stay very liquid, so that we're there and can maximize on close-out opportunities, and those close-out opportunities then have to be at the right value.

Since that moves, that gives us the flexibility to deliver the value that the customer is wanting.

Okay.

Thank you.

But to be fair, seems like -- and tell me if I'm reading this wrong.

Seems like thus far, your business has held up really well, and you haven't seen any negative detrimental impacts from just how promotional it was in the holiday quarter.

That's because we went into the quarter with two things.

We went into the quarter with very strong packaway values, and we also -- we exceeded our sales expectation, so we also chased a big part of that through close-outs.

The key to delivering value to the customer is understanding what goes on around you.

You really need to have liquidity to make sure that you keep that relationship, so that the customer is satisfied.

Got it.

That's very helpful.

Thank you.

Your next question comes from the line of Richard Jaffe from Stifel.

Your line is open.

Appreciate all the color on the packaway, and that seems to be the gift that's going to keep on giving, as we go into 2016.

Looking at the product in the warehouse, do you see more quarters, or quarters that will be more impacted by packaway, or less?

Maybe you have gloves that will come out in November or swim suits that will come out in August, any direction, or is it evenly balanced on a quarterly basis, or seasonal basis, I should say?

Richard, I would say it's fairly evenly balanced, nothing to call out on a quarter-by-quarter basis.

That's helpful.

And despite the environment and the competitive pressure we talked about earlier, looking into 2016, your caution remains.

And is that the same old issues that we've talked about before, the competitive pressure, department stores discounting, or are there new things that are fueling your caution, despite the high level of success and tremendous headwind?

Richard, I'd say it's partly a mix of new and partly a mixture of old things, that bubble up, I think to two main factors.

The first is the uncertainty in the macroeconomic and retail environment.

I know you have heard us say that before, but this year seems to have gotten off to an especially wobbly start in terms of the economy.

So that's one reason for caution.

The other is our own tough multi-year comparisons.

Again, you've heard us say that before.

But again, if I just compare this coming quarter, Q1 versus last year, we're up against a 5% comp.

So again, a reason to be cautious there in our guidance.

Don't begrudge you the caution.

Just wondering if there were other factors.

I appreciate the input.

Thank you.

Your next question comes from the line of Bob Drbul from Nomura.

Your line is open.

I just have a couple of questions, I think.

On the geographic performance, can you comment a little on the West Coast business, and how you did in Texas and in the Southwest?

And I just wondered if you could maybe comment on how some of the outerwear businesses did throughout the quarter for you?

On geographic performance, Bob, as we mentioned, the Midwest continues to be our strongest region.

That's been true over the last eight quarters.

California, our largest region, also performed ahead of the chain average.

And I think you also asked about Texas.

Texas was relatively in line with the chain, on top of very strong comps last year, when it was one of our top-performing regions.

And as it pertains to outerwear, outerwear performed below Company average, as you would expect based off of the weather and not dissimilar to other retailers.

Great.

And could you just comment on how you plan freight for 2016, those costs going forward?

We do see in freight some cost increases, carrier rate increases, but it's just up slightly over 2015, is how we have it planned.

Thank you.

Your next question comes from the line of Matthew Boss from JPMorgan.

Your line is open.

Thanks, so new store productivity in the quarter looks a little lighter than in the past, where we've seen it.

Can you just talk about performance in your latest store openings, versus some of the more mature stores?

Are there any timing shifts, which maybe could have impacted this quarter?

And then just as a reminder, what comps do you guys see from new stores in the first three years versus the chain, and what's the average payback period?

Sure.

On new store productivity, there's nothing to talk about in the quarter.

There's always a mix of whether you're opening new market stores, or existing market stores.

We have said in the past that the overall new store productivity has come down over the last couple of years with our entry into the Midwest, and also our dd's expansion.

That said, you can see the Midwest continues to be our strongest comping market, as we continue to gain name recognition there.

What we usually see on the comp curve is over the first five years we comp faster than the chain, and we settle into about the chain average in year five.

Overall, we'll put about $1.5 million of capital, and working capital into a store, and the payback is about two years.

One quick follow-up on that.

When would you anticipate entering the Northeast?

Not for a little while.

We entered the Midwest about four years ago now, and the Midwest is a fairly big region, so we feel like we've got plenty of opportunity to build out that region.

That's probably going to keep us going, certainly for the next several years, so it's going to be some time before we enter the Northeast.

Great.

Best of luck.

Your next question comes from the line of Oliver Chen from Cowen and Company.

Your line is open.

Congrats on a really great quarter and end of the year.

Regarding the year ahead, as you are making these investments in labor, what are the major corporate strategies you're thinking about, in terms of in-store execution opportunities, with shrink, or how you may think about the ratio of tops to bottoms, or other opportunities like micro merchandising?

And then I just had a question for modeling on the basket.

Can we assume that merch margin, like AUR -- was AUR up, as merch margins were up?

I'm just curious about the dynamic there.

So I'll start with the components of comp, Oliver.

As we mentioned in our prepared remarks, the 4% comp was driven by a combination of higher transactions, which for us, that's our proxy for traffic, and an increase in the size of the average basket.

The higher basket was driven both by higher units per transaction, and AUR was up a bit, as well.

So all the components were up over last year.

And that's pretty consistent with the trend we've seen throughout the year in 2015.

Oliver, as it pertains to tops to bottoms, we wouldn't talk about that in this forum.

Okay.

And what about labor, and how you're staffing stores, and any efficiencies that you can drive, just as we think about incremental year-over-year opportunities?

Because your execution has just been stellar, so if you're able to share with us any corporate strategies there, it would help us just illuminate how we think about your numbers next year.

So Oliver, as Michael Hartshorn mentioned in the prepared remarks, we are going to be making further wage rate adjustments this year, including taking up the minimum hourly rate to $10 for eligible associates in the second quarter, and those costs, to be clear, are built into our guidance.

Now, as we put together -- we have a very detailed and rigorous budgeting process, as you might expect, and as we went through the budget for this year, we looked at lots of different areas that we could go after to try and capture efficiencies, and offset some of those increased expenses, increased wage expenses.

There wasn't one big silver bullet.

There were lots and lots of small savings initiatives, that all add up to a lot.

It's all the things you'd expect.

Some of them are reengineering processes in the stores, to better utilize labor hours.

But there's also things like looking for savings in terms of services and supplies that we purchase from the outside, looking for higher productivity in our DCs, looking for opportunities to trim non-merchant G&A.

So there's a whole bunch of, I would say, relatively small savings opportunities that add up to a lot and have allowed us to cover the wage rate increases, that Michael Hartshorn mentioned earlier.

And just finally, on the merch margins, it's great that you're making progress there.

What's the rationale for you being able to have that attractive view of merch margins going forward, in the context of some of your conservatism about how the marketplace looks?

Well, let me start by talking about fourth quarter.

So fourth quarter, we obviously outperformed the high end of our comp sales targets, so that meant we had faster inventory turns, resulting in lower markdowns.

We also benefited from our ability to take advantage of buying opportunities in the marketplace.

So both of those factors really contributed to better than planned merchandise margin.

Now, what we said in our guidance is that we expect merchandise margin up slightly for the year.

We did operate with lower inventories throughout 2015, and ended at down 2% on an average store basis, and we'd expect to operate a bit lower in 2016, as well.

And that should drive some margin improvement.

Thank you.

Best regards.

(Operator Instructions)

Your next question comes from the line of Brian Tunick from Royal Bank of Canada.

Your line is open.

I'll add my congrats as well.

Curious, if you look at the merchandise mix of the business this past year, and then you think three years from now, what do you think would be the biggest changes?

Would it be home growing faster than the rest of the business?

Would it be gifts and beauty?

Just curious if there's any categories you see moving over the next couple of years from where they are today?

And then the second question, really on new customer acquisition or your marketing initiatives.

Anything you could share with us, if you've done any work or studies over the last 12, 18 months about where your customers are coming from or what they're saying about Ross right now?

Thanks very much.

Brian, in terms of the merchandise mix, we basically see growth in all our areas.

If I had to select one area, I would say probably home would be that area.

We've got a lot of initiatives going on in there.

And gifts was a big portion of our fourth-quarter success in home this year.

So if I had to pick one, it would be home.

Brian, on your second piece about the customers, and the new customers specifically, our new customers frankly look a lot like our existing customers.

As we do research on the demographics, customers and what they're looking for, the new customers demographically look very similar.

What all our customers have in common, no matter what their demographic is they're all looking for great values and great bargains.

So in terms of making sure that we can attract more customers and retain customers, our main focus is having the best assortments we can, the best values that we can offer.

Your next question comes from the line of David Glick from Buckingham Research.

Your line is open.

Add my congratulations.

I wanted to go back to some of the differences that you were talking about between 2016 and 2015.

One important difference, seems like the department stores missed their plans by a much more significant margin in the fourth quarter, assuming there would be a lot more packaway opportunity as a result, and they're also pulling back more aggressively on their receipts that they plan for 2016.

So it does feel like they are being a little more conservative with their sales and receipt plans, particularly in the second half of this year.

And I'm just wondering, how does that scenario play out for you guys, and what are the pluses and minuses, given what you see, if I've characterized it correctly, what you see today?

Thanks.

Well, from the supply side, department stores have pulled back over the last couple of years in total, in how they plan.

But it's not about how you plan it.

It's really about the sales that materialize, and the rate at which you spend your receipt money.

So as you look at where the department stores ended in January, most of them ended with more inventory, and clearly ended with more clearance.

As we enter into the spring season, one would expect that there would be a bubble of inventory that we would see in spring, which we could use to fuel in spring, and back to your point on packaway, that would help us drive through packaway.

It's relative to how department stores plan.

It's relative to how the vendors plan with department stores, and how much risk they're willing to take.

But we do feel that there will be opportunities in the marketplace.

As long as traditional retailers continue to perform the way they're performing, you would think that there will be more opportunities there.

So from that perspective, on the supply side, we feel good, which is why we're keeping ourselves liquid, and feel we're well-positioned to take advantage of the opportunities in the marketplace.

If department stores' inventories are more in line in the back half, and they're always promotional, obviously, but if they're not in as much of a liquidation type scenario as they were in the fourth quarter of 2015, how does that impact your business?

Is that an opportunity on the merchandise margin front?

I'm just trying to think through what -- if that's potential opportunity, as well.

Just on the -- back to the supply line.

Sales are the key contributor to what happens with excess inventory.

So sales are not stable in the world.

The sales -- if you look at sales, they've been volatile, and you're watching department stores drop down.

So again, receipts versus sales are two different scenarios.

That's what creates that bubble.

In terms of margin, obviously chasing close-outs and keeping tight inventory control helps us to get better positioned to improve our merchandise margin.

The other thing I'd say, David, is that when it's less promotional, clearly we have more price differentiation.

We can offer better value.

That tends be better for us.

But as you look at this year, certainly the way this year has started, there's a lot of economic uncertainty out there, and who's to say whether or not the department stores are going to hit their sales plans later this year or not.

Anything could happen.

Which is why it makes sense for us to be relatively cautious, as we plan our business for the year.

Great.

Thank you very much.

Appreciate the color.

Good luck.

Your next question comes from the line of Marni Shapiro from The Retail Tracker.

Your line is open.

Congratulations on the quarter and on the year.

I remember many, many years ago when off-price used to be the least respected space, and now it's like the most coveted space out there.

It's kind of nice.

I guess I have two quick questions on dd's.

The first is, I wasn't sure, do you do packaways at dd's, and will you break out the percent if you do?

And you have a new President in place in dd's, and the business is doing well.

You're opening about the same amount of stores each year.

What do you need to see to take it to the next level of store openings at dd's?

Thank you for your respect, Marni, first of all.

You've always had my respect.

So on dd's, couple of quick answers to the early part of your question.

Yes, dd's does indeed use packaway.

And no, we don't break it out, just because dd's is a relatively small part of the Corporation, so we don't break out, disclose that information.

On the second part of your question, what would we need to see, actually, we're already seeing it.

We're pretty happy with dd's performance over the last several years.

We've been in a pattern here with dd's of better-than-expected gains in sales and profits over a few years now.

But we open just over 20 new dd's stores a year, which on a base of 170 stores, is quite a big growth rate.

So I don't think you should expect that we're going to ramp that up significantly, maybe in a given year, it could go up to 25, but it's not going to increase dramatically.

Our history, as you know, because you've been following us for a long time, is that we're relatively conservative as we grow our business.

We've grown Ross, and we'll apply the same thinking as we grow dd's.

So opening stores of 20 to 25 new stores a year, that's probably the right planning assumption.

That seems fair.

And along the same lines as growing the organization along with the stores, Ross always had many more buyers than your largest competitor, for many years.

You had an impressive merchandising staff, considering the size of the store base.

How should I think about that at dd's?

Has the merchandising staff and buying staff, is it much bigger relative to the size of dd's?

Are you fully staffed there, or is that still going to be a growing part of the business?

It's very much the same model as you just described for Ross.

We believe that fundamentally in off-price, having the strongest buying team is a key competitive advantage, and that applies to Ross and to dd's.

At dd's, we've invested in dd's buying team over the last several years, and we have built a very strong asset there.

Actually, I didn't really answer -- you asked a question earlier about Brian Morrow joining.

I think enhancing and strengthening the merchant leadership has also been part of the investment that we've made.

That's fantastic.

Best of luck.

Your next question comes from the line of Mike Baker from Deutsche Bank.

Your line is open.

So I just wanted to follow up real quickly on the wages issue, the move from $9 to $10.

Did you and could you quantify what impact that will have on your total cost structure this year, and how that might compare with any increases that you took in 2015?

We didn't quantify the impact because what we said is we've been able to substantially mitigate those costs, and as Michael O'Sullivan referred to before, that was -- there are numerous cost efficiency projects, and frankly, no silver bullets.

The savings came from many different projects across many areas of the business, non-payroll and payroll-related activities.

So given that we've offset them in the guidance, and offset them in 2015, we haven't quantified the impact.

So with all the offsets, a similar impact in 2015 versus 2016?

In other words, impacts you that you can manage to offset?

Yes.

And I would say remember we went to $9 last year and $10 this year, so the impact's actually larger in 2016 than it was in 2015.

But still you're able to offset it?

Within the guidance, yes.

Second, just another quick one.

The earnings growth, how does it pace throughout the year?

We see the full year.

We see the first quarter.

So some quarters throughout the year are going to have to be better than the first quarter, and with the wage increase coming in the second half of the year, I would think that would impact that.

Then again, the packaway thing is reversing.

So which quarter should be bigger than others, in terms of earnings growth?

So we only give one quarter at a time.

It's really going to be driven by sales.

That's the impact, biggest impact on earnings.

But we wouldn't quantify other quarters, until we get to the conference call previous to the quarter.

Understood.

You're guiding to the same comp growth throughout the year, which is why I wanted to understand why the earnings growth would be different.

But okay.

I guess we can figure that out in our own model.

Thanks a lot for the time.

Your next question comes from the line of David Mann from Johnson Rice.

Your line is open.

Nice year.

Question, or couple questions on the balance sheet.

The inventory growth in the fourth quarter was only like up 3%, which was the slowest growth all year, which seems a little counterintuitive, given the abundant availability of merchandise that we all are hearing about.

I'm just curious if you can reconcile that.

Is there a reason you weren't more aggressive with taking advantage of availability, or was the availability maybe not as strong as we were all thinking?

No, David, there is availability in the market.

But as you're talking about buying packaway, there's a few things involved with buying packaway.

There's price, there's value, there's the timing of delivery.

So when we went in there and assessed what we bought, we ended at 47% versus 45%, so we were comfortable with that number, and we'll continue to buy goods as we come across, using that same criteria, understanding where we believe value will go in the future.

Okay.

And then one other balance sheet item.

The accounts payable leverage has been trending down all year, even though you're obviously turning the merchandise pretty fast.

Michael, anything you can share on that about why that's going down and where we would think that would go, perhaps in 2016?

I think in 2016, it would be similar levels to this year.

At year end, there was a timing difference.

If you'll recall last year we had the port disruption, and as part of our mitigation efforts, we brought in inventory early that had brought up leverage last year, so we were up against that compare.

But really, it's a function of timing of receipts including packaway receipts.

Okay.

Great.

Thank you.

Your next question comes from the line of Kimberly Greenberger from Morgan Stanley.

Your line is open.

Great.

Thank you.

I will add my congratulations on a really great fourth quarter and a fabulous year.

Barbara, I just wanted to follow up on David's question regarding the 3% growth in inventory in the fourth quarter.

Would the right conclusion be, based on the comments that you just made, that your view of where the value, or where maybe the market price of goods is going in the short term, might be down, and so you were basically holding back committing to packaway goods, given your cautious outlook?

And then as a result of that, your view would then be, you might be able to in fact buy even more goods in the February, March, even April timeframe, relative to those that you that you could acquire in November and December?

Is that the right read on the situation?

I think the way I would look at the situation is whenever we buy packaway, whether it was this past fourth quarter or any fourth quarter, those are the metrics we look at: price, value, timing of when we want to bring it in.

So we're just going through the same process we normally go through.

So when we went out and there were goods available, we went to see if we thought it met the criteria of where we thought we were going, and in some places -- you're assuming that the vendors have merchandise, they're going to move on a price.

Right?

So sometimes vendors move on the price based on their needs.

It's the end of the quarter, it's the end of a half.

So there's a lot of variables that we can't control.

The only thing I can say is that we bought what we thought was appropriate.

We ended with 47% versus 45%.

We feel comfortable with that number, and ultimately, we're only going to buy what we think is the right price.

Packaway is very hard to nail down.

In a quarter in the EOM, there has to be -- there is some art to buying packaway.

You have to feel comfortable that after you have put that in there, when you go to bring that out, whether it's four months later, eight months later, six months later, depending on the product, that the value is right.

There's a lot of variables that we can't determine, as we're out in the marketplace, but that's really what the buyers do every day of the week.

So that was really our assessment in the fourth quarter of how we felt about packaway.

Now, whether vendors will move off the price as we get further into the next season?

Maybe, maybe some people will hold inventory over.

I can't answer those questions for the vendors.

I can only answer what we feel comfortable in doing, which is the same thing we've done every season.

Great.

And just one follow-up to that.

Do you -- the vendors in general seem to have a somewhat challenging 2015, including a tough Q4.

Were you hearing from any of your vendors that they thought maybe there might be a change in strategy, opportunity in 2016, or a different way to approach their own inventory management?

Do they reveal that information to you, and do you have any color on perhaps what may be happening broadly among the vendor community, that you might be able to share in this forum?

Not really, Kimberly.

Vendors aren't going to be quick to be telling us that they're going to have more or less inventory.

So it's really -- each vendor does their own thing.

I can't really determine that, to be honest with you.

Okay.

Good luck here for 2016.

Your next question comes from the line of Daniel Hofkin from William Blair & Company.

Your line is open.

Great results, once again.

Just a couple of quick questions.

So thinking about beyond -- I know you haven't given guidance for next year yet.

Is it fair to say that you would likely expect further wage increases beyond this year, similar to what your largest competitor has discussed?

And I guess related to that, what enables you beyond this year to get to the low double-digit normalized EPS growth, given that this year's wage increases, that you're offsetting them in a number of ways on SG&A?

And then I have one follow-up.

So Daniel, as you say, next year, we haven't released guidance for 2017 yet.

But I think we've said before that we would expect that over the next few years as the economy -- or if the economy picks up, that we may see more expense pressures, not just us, but in general, companies and retailers will face more expense pressures, including higher wage rates.

Obviously, as we start to plan 2017, which won't be for some time, but as we start to plan for 2017, we'll start to look at what are the kinds of things we can put in place to offset those kinds of expense pressures.

Too early to comment on those now, but that's the process that we would go through.

Okay.

Is there any just big picture thing, in terms of like -- that allows you to get to a more normalized low double-digit EPS growth over time?

Well, just to be clear, we ended the year with EPS up 14%, despite the wage increase on a 4% comp.

Certainly in between a 3% and 4% comp, we think we can get to double-digit EPS growth over the longer term.

It's worth underlining that point.

Our guidance this year is obviously 1% to 2% comp, and that's what's driving the EPS guidance.

As Michael Hartshorn just said, at a more normalized comp, I think we've said in the past that our long-term model includes a 3% to 4% comp.

At those levels, we expect low double-digit EPS growth.

That's helpful.

Thanks.

As it relates to AUR and the slightly different trend for you versus the main competitor, any comment there in terms of what -- I know it's presumably not any inflation.

There's probably some mix there, but what's driving the moderately higher AUR for you, versus the other Company?

For us, it's a bit of mix, but it's also, we continue to operate with lower inventory levels, which means we're taking less markdowns, we're turning faster, and it has an impact on AUR, you're selling at higher prices.

I'd say so between those two, mix and our lower markdowns, is what's driving the higher AUR.

Very helpful.

Thanks.

Best of luck in the coming year.

Your next question comes from the line of Paul Lejuez from Citi.

Your line is open.

Just wondering, as far as CapEx once you look beyond this year, is there anything lumpy we need to be thinking about over the next several years that might be on your radar screen, that you can share with us?

And also just thinking about, separately, where are your customers cross-shopping, which retailers do you see the most overlap with?

And curious, if you've looked at -- when you see a big box department store or retailer close, what sort of a lift do you get in nearby stores, if in fact you take a look at that?

Thanks.

Paul, on capital, at least over the next couple years it will look very similar to what we said for 2016, in the, call it $425 million to $450 million range, I would say.

So nothing extraordinary currently in our longer -- at least over the next couple years.

On the other two pieces of your question, customers, we operate in a very -- we operate in a pretty large and very competitively fragmented marketplace.

So when we ask our customers if you hadn't spent that $30 at Ross today, where would you have spent it?

We get a long, long list of companies that they would have spent that money at.

So from a cross-shopping point of view, we're competing with everyone, which is why we need to make sure we have the best possible values out there.

In terms of your --

Who do you think tops that list?

It depends on the particular store, the particular market that we're looking at.

Nationally, I think you could probably just pick our closest peers, and nationally, obviously, they would show up on that list.

But the point I'm trying to make is, none of them account for a very large share of that list, that the list itself is very fragmented and spread between many, many competitors, which is why we need to make sure that we're sharp versus all those competitors.

The last part of your question, though, big box department stores going out of business, and how that affects any of our individual stores, it's really hard to say, because the truth is that there are lots of things that go into the business that an individual store does, including traffic levels to that strip mall, the competitive intensity in that strip mall.

Sometimes, actually having more off-price competitors in that strip mall can actually be helpful.

So it's hard to say whether or not a large retailer nearby going out of business helps us or hurts us.

It depends who replaces them in that space, what happened to the traffic level in that strip mall, et cetera.

Just one more.

Any changes in your store size for your openings next year?

As you manage inventories down, just wondering if you're continuing to bring the size of the store down?

Thanks.

Sure, so the fact that we brought down our average inventory per store by about 40% over the last several years has presented us with a few opportunities to make the stores easier to shop, so we've certainly been doing that.

Expand into faster-growing or new categories.

Again, we've been doing that.

And then as you're referencing, also to reduce the store size.

Obviously that's feasible for new stores rather than existing stores, but we've also been doing that to some degree as well.

I would say the lower inventory levels have given us the opportunity to do a number of things with regard to the size of the store and how we use the space in the store.

Thank you.

Good luck.

Your next question comes from the line of Roxanne Meyer from MKM Partners.

Your line is open.

Great, let me add my congratulations on a terrific 4Q and full year.

My question is a follow-up on the home category.

I know that Barbara mentioned that over the next few years, she would think about home maybe presenting the best opportunity, and I'm just wondering how it performed in 4Q, and what opportunities you see in 2016?

Home performed better than the Company, and it was really driven by gift-giving in Q4.

The thing about the home category, it's so broad-based.

There's so many product classifications in there.

When you think about it versus apparel, there's just more things to go into, which is why I feel that home is a good category for us to grow.

Okay.

Great.

And then just really quickly, what comp do you need in 2016 to leverage your fixed costs?

So what we said in the past, Roxanne, it hasn't changed for 2016, that at a 3% comp we should be able to lever SG&A and 4% comp for occupancy costs.

Okay.

Great.

Thanks and best of luck in the first quarter.

Your next question comes from the line of Lorraine Hutchinson from Merrill Lynch.

Your line is open.

Just wanted to clarify a comment that you made earlier on the call, about the rough start to the year, and just confirm that you were talking about the overall macro, and not Ross specifically.

Yes, to be clear, I was just referring to the fact that the overall economy, there seemed to be a number of sort of concerns and questions out there about the overall economy, and we don't know to what degree that will impact retail and our business over the coming 12 months.

Great.

And then as wages continue to rise, are there any investments to make in your distribution centers, to maybe make them a little bit more efficient?

Yes, that's actually one of the things -- as we put together the budget for this year, as you'd expect, one of the things that we looked at were any efficiencies, any areas of the DC, any processes in the DC that we could reengineer or automate, and certainly, that's one of the areas that we've pursued, in terms of coming up with offsetting savings.

I would say it's just one of the areas.

There are other areas in the Company as well such as stores, processes in stores, G&A, supply costs, et cetera, that we've also looked aggressively at.

Thank you.

Your next question comes from the line of Stephen Grambling from Goldman Sachs.

Your line is open.

Just wanted to make sure I'm clear on the gross margin and packaway topic.

This was one of the biggest swings, as it relates to the impact on both of these in years.

So can you just clarify some of the drivers of these factors, given the absolute percentage of packaway didn't seem to move much?

So the absolute dollars of packaway did drop during the quarter, Stephen.

So as we've talked about in the past, we capitalized the cost to store and process packaway, including fixed cost, and for us, we charged gross margin or charged cost of goods sold when it sells.

So for us, the absolute dollar value of packaway fell during the quarter, which means we had to take a charge, and that was greater than the previous year.

Of the 100 basis points of distribution center deleverage in the quarter, all of that was related to the packaway timing.

That's helpful.

And then an un-related question.

Some of your peers have had pretty good success with loyalty programs.

Can you just remind us of your own thinking there?

Sure.

So we don't have any plans right now to launch a loyalty program.

We're always willing to look at new ideas.

But frankly over time, we found the most effective way to build customer loyalty with the off-price customer is to consistently offer great deals, great bargains.

So more than anything else, that's how we build loyalty.

Fair enough.

Best of luck this year.

Thanks.

Your next question comes from the line of Jeff Stein from Northcoast Research.

Your line is open.

Barbara, quick question on the junior category.

That's historically been one of the stronger performing businesses for you, and no mention of it on the call.

Just wondering how it performed?

Juniors performed in line with the chain average, and it was up against very strong compares in the prior year, so we're pleased with the junior business.

Okay.

And with regard to packaway, I'm just curious, do you still have goods in inventory from the port slowdown last year?

Because I would imagine that would be some pretty high margin stuff that you could put out now, if you still have some.

As it pertains to the mix, you're talking about the actual mix we own in our assortment?

It's hard to tell.

Go ahead.

I was going to say because -- yes, it depends on the mix that you have in your packaway, so I'm wondering what percent of your packaway, for example, might be goods that you bought during the spring and perhaps early summer last year, as a result of the port slowdown, and how much of that might flow through your P&L during the first quarter?

I would say, Jeff, that most of the port issues were really in the first quarter of last year.

And given that timing, I think there would be very little that we bought that long ago, that would still be in packaway.

Got you.

That said, the port slowdowns could have had some knock-on effects in terms of inventory that became available in subsequent quarters.

Hard for us to identify and quantify that, but certainly anything that we bought in more recent quarters could well still be in our packaway balance.

It's hard to tell at a certain point what was coming from just business being off in the department store sector.

The supply that came from there, and the supply that came from the port.

After a while, it just became one large supply.

One lump.

Okay.

Thanks a lot.

There are no further questions at this time.

I will turn the call back over to Barbara Rentler.

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

Have a great day.

This concludes today's conference call.

You may now disconnect.