羅斯百貨 (ROST) 2016 Q3 法說會逐字稿

(Technical difficulty) 2016 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 FY15 Form 10-K and FY16 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, Vice President of 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 very pleased with our better-than-expected sales and earnings growth in the third quarter, as customers responded favorably to the compelling values we offered throughout our stores.

Earnings per share for the period were $0.62, up 17% on top of a robust 15% increase in the prior year.

Net earnings grew to $245 million compared to $216 million last year.

These earnings results include a benefit of about $0.01 per share from favorable timing of expenses that are expected to reverse in the fourth quarter.

Sales for the third quarter rose 11% to $3.1 billion, with comparable store sales up 7% versus a 3% gain last year.

Operating margin was above plan, growing 55 basis points to 12.6%, driven mainly by higher merchandise margins.

For the first nine months of FY16, earnings per share were $2.06, up 11% on top of a 15% increase in the prior year.

Net earnings were $817 million, up from $757 million last year.

Sales year to date rose 8% to $9.4 billion, with comparable store sales up 4% on top of a 4% gain in 2015.

dd's DISCOUNTS continued their year-to-date trend, with strong performance in the third quarter.

California was the strongest region during the period, while shoes was the best-performing category at Ross.

Our ladies apparel business also continued to strengthen as shoppers responded to our improved merchandise assortment.

As we ended the third quarter, total consolidated inventories were up 4% compared to the prior year, with average in-store inventories down slightly.

Packaway as a percent of total inventories was 45% compared to 48% at this time last year.

As planned, we completed our 2016 store opening program during the third quarter with the addition of 25 new Ross and nine dd's DISCOUNTS.

We expect to end FY16 with 1,338 Ross and 192 dd's DISCOUNTS, an increase of 84 locations for the year.

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

Thank you, Barbara.

Let's start with our third-quarter results.

Our 7% comparable store sales gain was driven by increases in both traffic and the size of the average basket.

As Barbara mentioned, third-quarter operating margin was better than planned, increasing 55 basis points from last year to 12.6%.

Cost of goods sold improved by 50 basis points, driven by 50 basis points in higher merchandise margin combined with a 20 basis point decline in occupancy costs.

This was partially offset an increase of 20 basis points in buying expenses.

Selling, general and administrative expenses during the period improved by five basis points, as leverage on the 7% increase in comparable store sales was partially offset by higher wages and certain other nonrecurring costs.

During the quarter, we repurchased 2.8 million shares of common stock for a total purchase price of $179 million.

Year to date we have bought back a total of 9.1 million shares for an aggregate price of $530 million.

We remain on track to spend a total of $700 million for the year to complete the two-year, $1.4 billion stock repurchase program approved by our Board of Directors in February 2015.

Let's turn now to our fourth-quarter outlook.

While we hope to do better, we are maintaining our same-store sales guidance for a 1% to 2% increase.

This range is on top of strong 6% and 4% gains in 2014 and 2015, respectively.

We expect earnings per share for the 2016 fourth quarter to be $0.72 to $0.75, which reflects the impact from the previously mentioned expense timing that benefited the third quarter.

This updated range compares to earnings per share of $0.66 last year.

The operating statement assumptions for the fourth quarter include the following.

Total sales are projected to grow 4% to 5%.

Operating margin is forecast to be 13.2% to 13.4% versus 12.7% in the prior year as we anniversary higher packaway costs that negatively impacted last year's fourth quarter.

Net interest expense is estimated to be about $4 million.

Our tax rate is planned at approximately 36% to 37%.

We expect average diluted shares outstanding to be about 392 million.

Based on our year-to-date results, along with this fourth-quarter forecast, we are now projecting earnings per share for the full year to increase 11% to 12% to $2.78 to $2.81 on top of a 14% gain in FY15.

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

Thank you, Michael.

Again, we are very happy with our third-quarter sales and earnings that were well ahead of our expectations.

As Michael just mentioned, we face our most challenging multi-year comparisons this holiday season.

There is an ongoing uncertainty in the macro economic, political, and retail environments that could once again between very promotional fourth quarter.

Despite these potential headwinds, we believe we are competitively positioned for the fourth quarter as our merchants have done a terrific job of acquiring a wide array of exciting and sharply priced name brand fashions and gifts to appeal to today's value-driven holiday shoppers.

To sum up, we see consumers increased focus on value continuing for the foreseeable future.

This, along with the solid execution of our short- and long-term strategies, makes us optimistic about our prospects for continued growth in sales and earnings.

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

(Operator instructions)

Paul Lejuez, Citi.

Thanks, guys.

Can you remind us of what your merchandise margin typically looks like on packaway merchandise compared to your normal in-season buys?

Has there been anything in the quality of packaways you've seen in the past few quarters that's changed that relationship at all?

From a margin perspective, Paul, the margin on packaway is very similar to flow merchandise or direct-to-store merchandise.

To us, it's the best value for the customer.

(Multiple speakers) That's been consistent over time, Paul.

No real change over the past several quarters.

Got you.

Thanks.

One follow-up.

It looks like D&A growth slowed substantially.

Can you talk about what maybe going on, on that line?

On G&A, we obviously had a 7% comp.

We were five basis points lower, partly driven by --

D&A.

I'm sorry, Michael.

I was asking about D&A.

Yes.

Sorry.

I thought you said G&A.

On capital spending, we are forecasting for the year about $315 million in capital, which is lower than we projected at the beginning of the year due to delay in some corporate office and supply chain projects that we expect to push into next year.

Any initial thoughts on the CapEx budget for next year?

Expectation at this point would be around $400 million, similar to how we started this year.

Great.

Thanks, guys.

Good luck.

Lindsay Drucker-Mann, Goldman Sachs.

Thanks.

Good afternoon, everyone.

I was hoping to dig in a little bit on the drivers in G&A.

I think that you mentioned some nonrecurring costs that happened in SG&A in the quarter, but also some timing benefits that happened in the third quarter.

Could you add a little color there?

Sure.

I will break the timing in the quarter.

The timing in the quarter was actually a gross margin component.

Packaway ended a little higher than we had in our current -- original expectations when we entered the quarter.

So that timing moved from Q3 to Q4, which is why the Q4 guidance came down by about a penny.

In terms of G&A, we ended up five basis points better.

We would've expected more leverage on the 7% comp.

That was driven by higher wages and as we mentioned on the call, one-time nonrecurring expenses.

Okay.

Your inventories per store were actually down despite a really strong comp.

I was wondering if you could talk about -- we've seen inventories down significantly at a number of department stores.

How would you characterize the buying environment or the availability of product and also the driver of your own inventory reductions per store with the strong comp?

Lindsay, I'll separate that into two pieces, first of all the availability and I'll let Barbara comment on that in a moment.

In terms of the inventory in our stores, that's driven by our own plans.

We tend to plan our inventories with some discipline just to make sure that we can drive turns if the sales trend is strong.

Even though, obviously, our sales trend was very strong in Q3, we've kept our inventories in line as we go into Q4.

I will let Barbara comment in terms of the availability of merchandise.

To make in terms of availability, it's pretty broad-based and spread through all the markets.

It's been obviously a lot of availability despite the fact that department stores have kept their inventory bases in line.

There is definitely more goods out in the market at this moment.

Thanks very much.

Adrienne Yih, Wolfe Research.

Good afternoon and congratulations.

My question was on the resolution of the spring product issues.

It seems like that's clearly behind, but I was wondering if there was any impact whatsoever into the third quarter?

How much chase or open to buy do you actually still have available to get to a higher comp, similar to what you did in the third quarter?

Thank you.

In terms of impact of spring product?

Just to clarify, the spring product going to third quarter?

Sorry.

This spring product issue that was from Q1 --

Just the issue itself, a hangover effect?

We did not have a hangover.

(Multiple speakers) We did not have a hangover effect in terms of product moving into the third quarter.

Could you clarify the second piece of the question again?

I think on the second piece, just to -- I'll just answer that directly already.

Our business is about chasing sales trends, so I will remind you coming into Q3, our guidance was a 1% to 2% comp in Q3 and we were able to chase it up to a 7%.

We feel pretty good about our ability to go out and get extra merchandise in Q4 if the sales trend is there.

Okay.

(Technical difficulty) about over levering to some of the excess inventory that was out there?

Thanks.

Sorry, Adrienne, you were cutting out there.

Could you repeat the question?

I'm sorry.

Just on the packaway opportunity that you have, how opportunistic was the buying last year in terms of perhaps any margin upside?

Does that make sense?

To the extent that you were able to buy at better-than-historic pricing, average unit cost?

Yes.

We wouldn't expect to see a lot of margin expansion from that.

What we would have done is to the extent we're able to buy great product opportunistically and put it into the hotel, put into packaway, when we flow it out what we're really doing is trying to drive sales.

That's really where we look for those bargains to really drive sales rather than add to our margin.

Okay.

Thank you very much.

Best of luck.

Great job.

Omar Saad, Evercore ISI.

Thank you.

Great quarter.

I wanted to ask if you could talk about how much scale the current supply chain, the distribution centers, the infrastructure you have, how much you can handle?

When do you expect, as you think out over time, the next major round of investments in IT and supply chain?

Sure.

In terms of major processing facilities, major distribution centers, just as a reminder, we added a new distribution center last year, that was in 2015, and we had added one before that in 2014.

Some pretty lumpy investments that we've now worked our way through.

Given our current growth projections, we would expect that we would need additional major distribution capacity probably in about four or five years from now and if you back off that, you would probably start some of the capital spending a year or two before that.

It's going to be a while before we have those kind of lumpy investments again.

Okay.

If I could have one follow-up, in terms of the great comp number you put up this quarter, if you think about the upside to perhaps where your expectations were three, six months ago, is more of the upside coming from the packaway product or the regular flow?

It's a combination.

I would not call out one or the other.

The truth is, the upside really comes from the customer coming in and buying more product.

We've been able to get great packaway product and great flow product in order to fuel that sales trend.

The merchants are chasing the sales trend as we go.

Understood.

Thank you.

(Operator instructions)

Marni Shapiro, Retail Tracker.

Hey, everybody.

Congratulations, fantastic quarter.

I was curious if there were any segments in the quarter that surprised you, either to the upside or to the downside, be it home, personal care, juniors, other than I believe you called out footwear.

Any other callouts?

I wouldn't say that, that surprised us.

Our home business continued to perform well.

Shoes has been performing well all along and we felt good about our assortments in ladies as we were starting to move and improve the assortments.

We were happy with that performance.

I guess that would be -- if anything, that would be the surprise is that business has been moving from quarter to quarter in the right direction.

But, overall, I wouldn't say major surprises because home and shoes have continued and have been good all year.

Within ladies, was it active wear, was it juniors, or was it across the board?

In ladies, active wear, active wear is performing just fine.

I would say it's really more in ladies and juniors would be at this moment in time.

Excellent.

Best of luck for the holiday season, guys.

Thank you.

Lorraine Hutchinson, Bank of America.

Thank you.

Good afternoon.

Just wanted to follow up on the increase in basket size that you commented on in the prepared remarks.

What was the driver of that?

Was it a unit or a pricing increase?

Sure, Lorraine.

As we mentioned in the prepared remarks, the 7% comp was driven by higher traffic and an increase in the basket size.

Traffic was slightly larger increase than basket.

The basket was all driven by higher units per transaction.

AUR was relatively flat.

Okay.

What do you expect for AUR trends going forward?

I don't think we'd comment at this point, but it's run relatively flat all year around for us.

Thank you.

Brian Tunick, Royal Bank of Canada.

Thanks.

Good afternoon.

Curious, I guess for Barbara, maybe can you talk about what categories might be the biggest opportunity you see for next year or maybe where some of your buying team is spending their time?

I guess also curious on the real estate pipeline, any initial thoughts from a planning perspective why either the store growth rates or mix could look different than what we saw this year?

Thanks very much.

Sure.

In terms of categories for next year, we still feel very good about our home business.

We feel there's a lot of opportunity that goes on in home.

It's very broad based.

If we continue to execute our strategies effectively in ladies, we would be feeling positive about our ladies business as long as we stay on track and execute appropriately.

In terms of where the merchants are spending their time, all the merchants are spending their time in the market, not just home merchants, not just in specific areas that we think we would expand for next year.

All merchants are spending their time in markets, again, because there's so much availability and potential opportunities.

Brian, on your question about real estate and number of stores, obviously we'll be more specific when we talk about 2017 guidance in February, but I think it's a fair bet.

If you look at our store openings over the past several years, we run at typically 80 to 90 net new stores per year.

I would not expect a dramatic deviation from that going forward.

If I could just throw in one more question, obviously you guys have talked about wage pressure now and some of the things you're doing to absorb it.

But are there other additional opportunities, both in the supply chain, on the store side, that you guys are finding to offset the wage pressure?

There always are.

As a company, we go through a very rigorous and detailed budget process.

There's a lot of expense discipline within different functions within the Company, so we're always looking for new opportunities to find efficiency and drive savings.

Again, we will talk more about that when we give 2017 guidance.

I mean, I would say that we feel pretty good about our ability to offset the wage increases that we've absorbed in the last couple of years.

There's a limit to the degree to which we can offset those increases going forward.

All right.

Super.

Good luck this holiday.

Michael Binetti, UBS Securities.

Good afternoon and my congrats on a nice quarter.

Let me just ask you, the department stores have come up a few times, it seems their strategy has been to reduce their inventories to try to lower their markdown cadence.

If they are successful and you guys wake up tomorrow and see the department stores leading their industry to higher AURs, how do you strategically think about that?

Is that bringing an AUR opportunity for you, or do you guys typically look for opportunities to gather market share in that situation?

I would say we would welcome that.

If it got less promotional, we would see that as an opportunity to gain more share and to drive sales.

Specifically for us, it would be about sales rather than margin.

I think as Barbara said in her remarks, the indicators that we see cause us to think that the fourth quarter will likely be very promotional.

Those indicators include the fact that we're seeing plenty of merchandise supply.

Presumably that supply was made for someone.

Secondly, when we look at Q3 results that have been reported so far, they look relatively weak across the retail sector.

Thirdly, as Barbara said in her remarks, the political and economic environment looks uncertain.

If you mix all those together, it suggests that the environment is likely to remain promotional, rather than the other way around.

If I could maybe continue on that, I feel like there's not a week that goes by that we don't hear another one of the department store brand companies updating the strategy to include significantly lower inventory buys going forward, so maybe there's still some inventory out there today.

But in general, the off-price channels continue to comment that inventory in the marketplace remains robust.

You guys have certainly benefited from better inventory turns but better merchandise margins over time.

If the brands do follow through with that strategy and take inventory lower, it becomes a bit counterintuitive for us to keep hearing the off-price industry in general just saying that we still see plentiful inventory out there.

How do you think forward to if inventories do get a little bit harder to come by, how you look at approaching your business for next year?

Thanks.

Those are good questions.

I think it all depends on what sales those department stores are able to do and the comparison between those sales and the inventories they've bought themselves into.

Right now, as I say, based upon what we're seeing in the marketplace, we see no problem with supply.

Thanks a lot.

Laura Champine, Roe Equity Research.

Good afternoon.

Wanted to ask again about your expectations for Q4, because the comp guidance you've given does look very conservative, given what you just put up in Q3.

Would your expectation be in Q4 to continue to gain share within apparel?

Is it conservative on apparel just generally and on retail generally, or is there something that gives you pause about your own performance?

I think it's nothing specific to us, Laura.

I think it's more about the external environment and really the things that Barbara has mentioned, that the broader political and economic environment, that's uncertain.

The Q3, the third-quarter results that have been reported so far look relatively weak and that suggests that it could get pretty promotional as retailers try and either hold onto or avoid losing share.

The combination of those two things makes us relatively concerned about the external environment.

The only thing that's specific to us, I suppose, is the fact that we're up against that toughest year-over-year comparisons in the fourth quarter on a two- and three-year basis.

So that's the other thing that factored into our guidance.

Got it.

Thank you.

Oliver Chen, Cowen and Company.

Hi.

Congrats on the best comps in retail.

Regarding the comps and the traffic gains, what was happening with traffic with respect to how it was so impressive?

Were you able to chase into categories and did you have to delay shipments in terms of some of the seasonal weather?

Just curious about how that traffic number was so impressive.

A related question is just on the merchandise margins.

Is that attributable to the strong inventory control?

Thanks.

Oliver, I will start with the merchant margins.

We obviously outperformed the high end of our comp sales targets so that meant we had faster turns resulting in markdown leverage.

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

Both of those factors contributed to the higher merchandise margin.

In terms of chasing into categories, again, there's been a lot of availability in the marketplace so the merchants are out in the market every day looking for opportunities so they have been able to chase into categories that were selling.

In terms of seasonal products, we had relatively conservative seasonal plans for the Q3 and so seasonal performance has been overall fine at this point in time.

The categories go forward, remains to be seen what we find out in the market place as we chase our way across.

Best regards.

Thank you.

Matthew Boss, JPMorgan.

Thanks.

Congrats on a nice quarter.

On the 7% comp, was performance pretty consistent throughout the quarter?

As you dig into your performance versus the choppy macro backdrop that you call out, are you seeing a broadening of the customer base, new customers shopping the store?

Just the best way that you track it.

I'm curious what you're seeing.

In terms of trends during the quarter, Matthew, the comps were similar across all three months in the quarter.

In terms of what's driving that 7% comp, it's hard for us to tell, Matthew, but it's almost certainly a combination of certainly some new customers and then some existing customers who are just shopping us more, looking for values and happy with what we're able to offer them.

Got it.

Then just a follow-up on margins.

For the fourth quarter, what's the best way to think about recapturing the 100 basis points related to the packaway last year?

Just curious how we should think about recapture of that loss from last year?

The guidance assumes some recapture of the 100 basis points.

Our practice is not to call out specifically in upcoming guidance, but it's part of the driver of the EPS growth in the fourth quarter.

Okay.

Best of luck.

Kimberly Greenberger, Morgan Stanley.

Great.

Thank you so much.

Michael, I wanted to ask about wage inflation and SG&A leverage.

It seems like the leverage point today, perhaps starting in the third quarter, sits a little bit higher because of the wage increases.

I'm wondering if you can just talk to what comp do you need to leverage SG&A in a normal environment?

It seems like starting in the third quarter and continuing maybe through the first half of 2017 that comp needed is a bit higher because of the incremental wages.

Could you talk us through that?

Sure, Kimberly.

The third quarter levered by 5 basis points on the 7% comp.

As we mentioned in our comments, that was partly driven by wages, and that really hasn't changed from the first part of the year, but it was also impacted by one-time nonrecurring charges we took in the quarter.

I'd say the leverage point change in the quarter was those nonrecurring cost.

At this point, we continue to believe, at least in the next couple years, that the leverage point continues to be about 3%.

About 3%.

Okay.

Great.

I'm wondering if there was any year-over-year increase in incentive compensation either driving that 20 basis points of gross margin deleverage or in your SG&A?

Lastly, Barbara, I apologize if I did not hear this correctly, but could you just comment on the apparel execution in the women's business?

I think on the August earnings call you had mentioned you'd made a great deal of progress in the second quarter, but you weren't entirely happy yet.

I'm just wondering if you can just update us on the progress there.

Thanks.

Kimberly, on the incentive costs, yes, on both gross margin and SG&A.

In our notes we mention that buying expenses were 20 basis points higher than last year and that was mainly from higher incentive costs given the outperformance during the quarter.

Kimberly, in terms of the ladies business, we do feel like we're making progress.

We are moving in the right direction and we are expecting as long as we execute effectively where we had some real major execution issues in Q1 that we're going to continue to see a strengthening in the business.

It's month to month, improving business by business.

We do feel like we've made progress and we do feel like we're on track as long as we continue to execute appropriately.

Terrific.

Thank you so much.

Ike Boruchow, Wells Fargo.

Hey, everyone.

Congrats on a great quarter.

Michael, a quick one on wages.

Can you remind as much as you've shared this, what kind of EPS headwind wage inflation has been or do you project will be for you guys this year.

Then just not asking for guidance but just simplistically when we think about next year, does that headwind, is it similar, does it lessen, or does it increase?

Ike, we obviously haven't called out the impact of wages because we've been able to offset the impact to-date.

Obviously, we're working through our finalizing our 2017 budget and will be in a better position at the end of the year when we give our guidance for 2017 on the potential impact.

Got it.

Thanks.

Bob Drbul, Guggenheim.

Good afternoon.

Just had two questions.

The first one is, regionally you called out California.

I was just wondering if there are any callouts, specifically the Midwest has been pretty consistent for you guys, how you're doing in the Midwest.

And the second question would be, I know it's early and a lot of subjectiveness to this, but if corporate tax rates were to be reduced, could you maybe help us think about how to think about the possible uses of cash in a scenario where additional cash became available in size for you?

Sure.

On the regional performance, geographically the strong comp performance was very broad based.

We mentioned California.

The Midwest also performed very well.

On tax policy, I think it's really too early to comment on the impact and what policy changes ultimately get implemented.

Great.

Thank you.

Roxanne Meyer, MKM Partners.

Great.

Thanks.

Good afternoon and congratulations on a terrific quarter.

I just had a follow-up question on category performance.

Obviously home and shoes were called out as standouts.

I'm just wondering if you could also share other categories that were both above as well as below the chain average?

Thanks a lot.

I would say that other businesses fell pretty much closer in line in apparel.

In terms of probably some of our weaker performances, we're still struggling in accessories as we are working our way through that.

After that, I would say pretty much most of the businesses fell in line.

Okay.

Great.

Thanks a lot.

Dana Telsey, Telsey Advisory Group.

Good afternoon, everyone, and congratulations on the results.

Any update on dd's and what you're seeing there and how you're thinking about it for 2017?

Also, any update on shrinkage?

Thank you.

Dana, on dd's, as Barbara mentioned in her remarks, dd's continued its strong performance in Q3.

The business is on track for another good year.

As we have over the last several years, this year we opened about 20 new dd's stores.

Again, we'll be more specific when we give 2017 guidance, but if I had to speculate I would say that you can expect that we're not going to deviate materially from that going forward.

On shrink, we finished our physical inventory, as we do every year in the third quarter.

Shrink results were slightly better than our expectations.

That said, shrink was a slight headwind versus last year as we anniversaried better than expected results from the prior year.

Thank you.

Simeon Siegel, Nomura Instinet.

Good afternoon.

Sorry if I missed it, but any thoughts on where you'd expect inventory to end the year?

Any color on the long-term merchant margin opportunity from here?

Thanks.

In terms of inventory for the year, I think we will continue to operate the business at slightly down and I don't think that our expectation would change for year-end inventories.

In terms of longer-term margin opportunity, at this point it's really about the sales line.

I feel like in terms of the things that have driven our margin improvement in the last several years, those things have included tighter inventory control, which has obviously driven lower markdowns, and improved shortage control.

There might be some incremental opportunity in both of those areas, but it will be relatively small.

The real upside opportunity on margin is going to come from ahead of plan sales.

Great.

Thanks.

Best of luck for holiday.

There are no further questions at this time.

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.