Operator: Good afternoon, and welcome to the Ross Stores First Quarter 2013 Earnings Release Conference Call. The call will begin with prepared comments by management followed by a question-and-answer session.
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 the aspects of the 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 fiscal 2012 Form 10-K and fiscal 2013 Form 8-Ks on file with the SEC.
I would now like to turn the call over to Michael O'Sullivan, President and Chief Operating Officer.
Michael B. O'Sullivan - President and COO: Good afternoon. Thank you for joining us. I will be presenting the prepared remarks today along with John Call, our group Senior Vice President and Chief Financial Officer. Michael Balmuth, our Vice Chairman and CEO is under the weather and cannot be with us this afternoon.
Also on the call are Norman Ferber, Chairman of the Board; Gary Cribb, Executive Vice President, Stores and Loss Prevention; Michael Hartshorn, Senior Vice President and Deputy CFO; and Connie Wong, Director of Investor Relations.
We will begin with a brief review of our first quarter performance followed by our outlook for the second quarter and fiscal year. Afterwards we will be happy to respond to any questions you may have.
As noted in today's press release, we're pleased with the slightly better than expected sales and earnings we delivered in the first quarter, especially considering this growth was achieved on top of strong prior year gains. These results continue to be driven by our ongoing ability to offer terrific bargains to today's value-oriented consumers.
Earnings per share for the 13 weeks ended May 4, 2013 were $1.07, a 15% increase on top of the 26% gain in the prior year. Net earnings for 2013 first quarter grew 12% to $234.6 million. First quarter sales rose 8% to $2.540 billion up from $2.357 billion in the first quarter of 2012.
Comparable store sales for the 13 weeks ended May 4, 2013 rose 3% over the 13 weeks ended May 5, 2012. This compared to a robust 9% same-store sales gain for the 13 weeks ended April 28, 2012. The strongest merchandise categories during the quarter were juniors and accessories while the best performing regions with the Pacific Northwest, Southwest and California.
Earnings before interest and taxes grew to a record 14.9% of sales, up from 14.4% in the first quarter of 2012. This increased level of profitability was mainly driven by higher merchandise gross margin and also benefited from favorable timing of expenses. John, will provide some additional color on these operating margin trends in a few minutes.
As we ended the first quarter, total consolidated inventories increased about 8% compared to the prior year, with average in-store inventories down about 3%. Packaway as a percentage of total inventories was even with last year at 45%. Both Ross and dd's DISCOUNTS' sales and profits continue to benefit from our ability to flow a larger percentage of fresh merchandise to our stores by operating our business with lower inventory levels. dd's sales and profitability improved in the first quarter as its merchandise offerings also continued to resonate well with their targeted customers. Our store expansion program remains on-track with about 80 locations scheduled to open during 2013, comprised of approximately 60 Ross and 20 dd's DISCOUNTS.
Now John will provide further color on the first quarter results and details on our second quarter guidance.
John G. Call - Group SVP and CFO: Thank you, Michael. Our 3% comparable store sales gain in the first quarter was primarily driven by an increase in the size of the average basket. Operating margin grew by about 50 basis points in the quarter to 14.9%. A 45 basis point improvement in the cost of goods sold was mainly driven by higher merchandise margin, which grew by about 50 basis points over last year, including approximately 5 basis points from a lower shrink accrual.
Freight and distribution costs declined by approximately 10 basis points each. The latter was mainly due to timing of packaway-related expenses. These favorable items were partially offset by approximately 15 basis points in higher buying costs and 10 basis points of deleveraging on occupancy. Selling, general and administrative expenses declined about 5 basis points, mainly due to lower store expenses as a percent of sales. During the first quarter, we repurchased 2.3 million shares for a total purchase price of $138 million. We are on track in 2013 to buy back about half of our new two-year $1.1 billion authorization or approximately $550 million in common stock.
Let's turn now to our second quarter guidance. For the 13 weeks ending August 3, 2013, we are targeting same-store sales to increase 1% to 2% over the 13 weeks ended August 4, 2012. This compares to a strong 7% increase in last year's second quarter. Earnings per share for the second quarter of 2013 are projected to be in the range of $0.89 to $0.93, up from $0.81 last year. This represents forecasted EPS growth of 10% to 15% on top of a 27% increase in the second quarter of 2012.
Our EPS targets for this year's second quarter are based on the following assumptions; total sales are expected to grow about 6% to 7% driven by a combination of new store growth and as previously mentioned same-store sales that are forecast to be up 1% to 2%.
We plan to open about 26 net new stores during the period including 19 Ross Dress for Less and seven dd's DISCOUNTS. We are targeting operating margin to be flat to up 20 basis points on top of an exceptional 110 basis point increase in the prior year for a projected range of 12.8% to 13%. We are planning net interest expense to be approximately $500,000 and our tax rate is expected to be about 38%. We also estimate weighted average diluted shares outstanding of about 217 million.
Moving to our outlook for the year. As noted in today's press release, we now project earnings per share for the 52 weeks ending February 1, 2014 to be in the range of $3.70 to $3.81. This compares to our initial forecast of $3.65 two $3.80 and earnings per share of $3.53 in fiscal 2012. As previously reported, the 53rd week last year added about $0.10 to earnings per share in fiscal 2012. This updated guidance range reflects that approximately $0.02 of the above planned earnings per share result in the first quarter is related to favorable timing of expenses that are expected to shift into subsequent quarters within the fiscal year.
Finally, as a reminder, we will no longer be reporting sales or providing sales guidance on a monthly basis.
Now I'll turn the call back to Michael for closing comments.
Michael Balmuth - Vice Chairman and CEO: Thank you, John. Again, we are pleased with our solid first quarter performance, especially considering our strong prior-year comparisons and the ongoing uncertain macroeconomic retail and political environment. We remain well positioned as an off-price retailer with an ongoing focus on offering compelling discounts on name brand fashions to today's value focused customers.
Looking ahead, we will stay focused on the most critical drivers of our business. First, we will continue to make strategic investments in our merchandise organization. Prioritizing and expanding these resources remains the key to further increasing our very large vendor base and our access to the best name brand bargains in the marketplace.
Secondly, as we have said before, we continue to fine tune our systems and processes to plan and allocate at a much more detailed level, which strengthens our ability to deliver great bargains to the right store at the right time. This initiative is more important than ever, especially with the lower levels of inventory we now carry, plus our current expansion into new markets.
Over the balance of 2013, we are planning selling store inventories to be down in the low single-digit range versus the prior year. As you know, operating on leaner inventories has improved sales, inventory turns and gross margin for many years now. Finally, we continue to implement numerous productivity enhancements and efficiencies throughout the Company. These programs have helped us to strictly manage expenses in our distribution centers, stores organization, and back office functions.
The successful execution of these initiatives has dramatically improved our sales productivity and profitability over the past several years. We believe our ongoing focus on these priorities will maximize our opportunity for future growth in sales and profits over both the short and long-term.
At this point, we would like to open up the call and respond to any questions you may have.
Operator: Daniel Hofkin, William Blair & Co.
Daniel Hofkin - William Blair: Nice results and just a couple quick questions. As it relates to the sales trend over the balance of the year, I know sounds like you're keeping the 1% to 2% full year comp plan. How would you expect traffic versus ticket to contribute for the year as a whole?
John G. Call - Group SVP and CFO: Daniel, in the first quarter, traffic was fairly flat. The contribution came from the average basket, which was up slightly. That kind of stuff was tough to predict. We think we do a good job of putting attractive bargains from the customers that helps drive traffic, so we don’t plan our business around necessarily what we think traffic (indiscernible) is going to do, but the customers tend to self-select. So I'll expect more the same; comps up 1% to 2%, traffic flat to up slightly.
Daniel Hofkin - William Blair: And as it relates to margin expectations for the second quarter, for the full-year, can you shed any more light in terms of between gross and SG&A what your expectations are?
John G. Call - Group SVP and CFO: Sure. implicit in the guidance is inventories as we said would be down kind of low-single digits. That implies faster occurrence on 1 to 2 comps, so we would expect some incremental gross margin increase partially offset by some deleverage in G&A.
Operator: Mike Baker, Deutsche Bank.
Michael Baker - Deutsche Bank: So, two questions; one, can you talk to us (indiscernible) home related business, which I think had been in area where you (added as well), but were making some changes there. Are we starting to see any benefit or traction from those changes? And then secondly, can you tell us how your new markets are performing, Chicago in particular? You've been there now for at least a year. I think its part of the comp base. So, can you talk to us about how those stores are comping and how your initial productivity is, etcetera?
Michael Balmuth - Vice Chairman and CEO: So, Mike on your first question about home, we actually feel good about the progress that we are making in home. As we came into the year, we had a plan to strengthen assortments in the home business and that plan is on-track. So, we are feeling good about the progress we are making there. On your second question regarding new markets, as you referenced we entered the Mid-West region in October of 2011, so it's still relatively early, but everything we have seen so far in terms of sales, customer research, on the ground customer feedback has been positive. So, we are feeling good about how those markets are doing. At this point although as you mentioned there are a few stores that have (turned comp), they haven't been comped for very long. So, I wouldn't call out those or talk about those specifically.
Michael Baker - Deutsche Bank: But your new markets are in line, above plans, below plans as expected.
Michael Balmuth - Vice Chairman and CEO: They are on plan to slightly better.
Operator: Brian Tunick, J.P. Morgan.
Brian Tunick - J.P. Morgan: I guess, sorry to do it to you again, but regarding lot of calls around JCPenney and perhaps they are going to be more promotional and driving traffic. So, just hoping you could maybe talk about any data you have regarding maybe your perspective of where market share might have come from in the last couple of years and maybe anything you could share about your core shopper, how many different retailers do you think they visit, so it's not just about JCPenney, I think, as we look at 2013. Thanks very much.
Michael Balmuth - Vice Chairman and CEO: Brian, I think as we've spoken before, I think one of the most important characteristics about the apparel retailing market is just how fragmented it is. There are many, many competitors. And as a result of that, we never take our customers for granted. They have plenty of choice about where they shop. And the importing thing for us is that we focus on delivering great bargains. And if we do that, then frankly, it doesn't really matter what any single competitor does. We know he will do well. And one other point I would make specific to – you referenced JCPenney, specific to JCPenney, is that, obviously, JCPenney had a promotional strategy I think until February of 2012, and if you look at the years leading up to that, we did very nicely. So if they go back to the future, I don't think it will cause us too much concern in terms of our long-term trend.
Operator: Laura Champine, Canaccord.
Laura Champine - Canaccord: My question is about the sales guidance. It looks really conservative just given what we're hearing from other retailers, and I know you don't have exposure to the nasty weather in the Northeast, but your trend in the most recent month was really strong. The 1% to 2% comp guidance for this quarter, what's driving that?
Michael Balmuth - Vice Chairman and CEO: When we came into the year, Laura, we cited a few sort of headwinds that were built into our guidance, some economic issues, the higher payroll taxes, sequester cuts, and then frankly (this time) we're up against very strong comps from the last few years. So, frankly, none of those things have changed. We're happy with how we did in the first quarter, but those economic headwinds are still there. And frankly if you look at it over a sort of three-year stacked basis, our guidance actually seems pretty reasonable. So, maybe the guidance is a little bit conservative and we'd certainly hope to do better, but right now we're comfortable with that sales guidance.
Operator: John Kernan, Cowen.
John Kernan - Cowen and Company: So I guess, thematically, how much faster can you guys turn inventory and how much more can you possibly benefit from lower in-store inventory levels from a merch margin perspective? And I've got one follow-up.
Michael Balmuth - Vice Chairman and CEO: At this point, John, we think maybe there's some additional incremental opportunity, which is why we're trimming inventories again this year and certainly our sales trend doesn’t seem to have suffered from that. So I think the real answer is we don't know how much opportunity there's left. We think there's probably some, but at this point it's probably incremental.
John Kernan - Cowen and Company: And then can you talk about some of the buying opportunities you've had given some of the weather volatility that's affected full-price retail?
Michael Balmuth - Vice Chairman and CEO: Sure. Actually, it's hard for us to isolate the drivers of supply, whether it's whether or the economy or competitive issues, but talking with Michael Balmuth earlier and talking with merchants, I know we are very happy about the supply that we are seeing.
Operator: Marni Shapiro, Retail Tracker.
Mark Friedman - Retail Tracker: It's Mark Friedman continuing in for Marni. Can you talk a little bit more detail about some of the strategic investment in the merchandise organization? Is there anything new that you have done in the last couple of months since reported year-end or that the way you are thinking about it going for 2014?
Michael Balmuth - Vice Chairman and CEO: Mark, I think people who followed us for some years know that we've longer guided the merchant organization as critical and so the key strategic asset that you have in off-price. So, we have invested a lot over the years in terms of developing one of the best merchant organizations that there is. So, it's really been a very long-term programming, long-term initiative for us. I wouldn't say there is anything new that we have done it's just more of the same in terms of strengthening out merchant group.
Operator: David Mann, Johnson Rice.
David Mann - Johnson Rice: In terms of the comment you made earlier about traffic, in past years even then I think the fourth quarter you saw nice traffic gain. So, I'm just curious if you can put some context onto why you think traffic might be moderating now. And do you have any efforts to specifically to try and drive traffic or expand the customer reach?
Michael Balmuth - Vice Chairman and CEO: David, we all knew that traffic number which was flattish that doesn't concerns a whole lot, it ebbs and flows, a point here or point there, so we don't think it's necessarily a bad factor in terms of what we have going on our comps, it came through our sales, it came through. We are seeing good flow, so we're not all that concerned.
David Mann - Johnson Rice: Then the ticket gain, is that coming more from units or price?
John G. Call - Group SVP and CFO: Mainly coming from price, at least in the quarter.
David Mann - Johnson Rice: Then, in terms of SG&A, I think on the last call and previous calls, you've talked about being able to leverage – your leverage point for expenses is about 1% to 2%. I guess in the first quarter, you didn't necessarily leverage or hardly levered with the higher comp, and then for the year, you're not talking about it too much. So, are you seeing a higher level of expense or is that leverage point changing at all?
John G. Call - Group SVP and CFO: No, we think – so, we may have said 1 to 2. Really, when we look at, it's probably 2 to 3 there's timing issues between quarters all that sort of thing, but on the year, we think 3 should deliver some leverage, flat to some, that's kind of where we are.
Operator: Oliver Chen, Citigroup.
Oliver Chen - Citigroup: Regarding a longer-term question, where do you think your operating margin could go and would that be more gross margin or SG&A leverage-driven. And as a follow-up, if you could – it sounds like there's a lot of opportunity domestic bricks and mortar, but could you update us on your thoughts on global and eComm? Thank you.
Michael Balmuth - Vice Chairman and CEO: Oliver, on your first question about margins. If you look at what's happened to our margin over the past several years, there's really been three drivers of our improved margin. One is lower markdowns which has been driven by tighter inventory controls. The second is lower shrink which has been driven by specific initiatives we've made around shortage control. And then, the third has been expense leverage on ahead of planned sales. So when you think about those three drivers, we think that there's no reason why we should give up on any of them. We don't see margins declining because we're not going to walk away from any of those three. But if you look at where the opportunities are going forward for incremental margin, it's really in that third one, further expense leverage from head-of-plan sales, which is the hardest thing to predict. So to answer your question, we think there might be some additional opportunity in margin, but it's really around sales, and if the sales are there, we'd be able to drive margin further. On your second question about e-commerce, as we've commented in the past, our assessment is that in e-commerce it's very hard for an off-price business to make money, particularly at lower price points and at the price points that we operate at, with the cost of shipping, the cost of marketing, taking returns, etc. The economics just don’t add up. Now most of the activity in the last few years externally has been with companies that operate at much higher price points, price points that we don't really compete at, and even those companies appear to be struggling to make money. So we don’t regard e-commerce as a high priority, at least not right now. For us the priority is really our bricks-and-mortar business, our offline business where we know we can be successful, we know we have strong returns, and we have plenty of growth opportunity, so that's really where our focus is.
Oliver Chen - Citigroup: As a quick follow-up, could you just tell us how you feel about the health of the consumer? Do you feel like you continue to see volatile trends in relation to how macroeconomically that customer – what kind of challenges they might be facing?
Michael Balmuth - Vice Chairman and CEO: Our observation is that the young the overriding characteristic about this economy is it's very unpredictable and that the consumer remains pretty stretched and they are looking for value. And in that kind of environment we would expect – I think you would expect that the off-price model when it's well executed should do pretty well.
Operator: Roxanne Meyer, UBS.
Roxanne Meyer - UBS Securities: I'm just wondering first if you could share any benefit from the calendar shift both in 1Q and looking ahead to the remaining quarter of the year, just how timing may have an impact on the cadence of your earnings. And then, second, juniors has been a source of strength for you guys for a while now. Just wondering if you've noticed any difference in trends between the consumer who is purchasing that category, whether disproportionally driving traffic or price or units versus some of your other demographics? Thanks.
John G. Call - Group SVP and CFO: So on the first question about the calendar, Roxanne, there is shift that favors the first part of the year. We have a week, kind of dislocation that doesn't matchup from a sales reporting standpoint versus a fiscal or earnings reporting standpoint. It's probably worth about a point comp, and that comes back in the back half, so the back half is actually hurt by about a point comp, so there's a 2 point swing between first half and back half in terms of our business and what that extra week meant.
Michael Balmuth - Vice Chairman and CEO: And then, Roxanne, on your second question about the juniors business, as we mentioned in the remarks, the juniors business was one of our top performing categories in Q1. And I would go on to say, I think the juniors business has long been an important business for us. it's a pretty well developed business for us, and we feel good about that business. I think we feel good about that customer segment. We've always done well with the younger customer.
Operator: Mark Montagna, Avondale Partners.
Mark Montagna - Avondale Partners: Just a follow-up on that calendar shift question. Is there – beyond just the comps, is there a margin shift beyond, say, leverage such as merchandise margin that might get shifted around because of the calendar change?
Michael Balmuth - Vice Chairman and CEO: There's couple other things implicit to our calendar. So, recall that in the third quarter last year we picked up a $0.02 based on a shortage true-up. That isn't in the plan or the guidance so far. And remember, the 53rd week as we've mentioned in the recorded comments, we picked up an extra $0.10. So you put that all together and normalize for everything, on the 1 to 2 comp, our guidance is that we'll grow earnings 8% to 11% for the year.
Mark Montagna - Avondale Partners: But I'm thinking in terms of if you shift a week out of the third quarter into the second quarter, is that week that's being shifted a high-margin week or a low-margin week? As I'm running across other retailers where there's an interesting dynamic that is actually kind of meaningful that way.
Michael Balmuth - Vice Chairman and CEO: That's mainly (indiscernible). I don't think it has to do with the margin percent between the quarters. It's mainly (sales of two).
Mark Montagna - Avondale Partners: Then the distribution expenses that are going to arise in the future with the packaway, should we just view that as evenly distributed between second through fourth quarters?
Michael Balmuth - Vice Chairman and CEO: Yeah. I'd say that's probably – that one's a little hard to predict. Packaways based on where the marketing conditions were, came a little bit higher than we had anticipated coming in, and right now we'd assume that that would flip in the second to third quarters, but we'll have to see what opportunities look like.
Operator: Dutch Fox, FBR Capital Markets.
Dutch Fox - FBR Capital Markets: I wanted to ask you a couple quick questions about dd's. Just being in the stores and looking at them, they appear to be improving. Actually they look very good year-over-year. I know you only talk about that concept directionally, but could you give us or help us a little bit with understanding how the dd's fleet is performing compared to the Ross Dress for Less stores and also how you expect that to evolve over the course of there? And I don’t have it in front of me, but you talked about whether or not the concept is going to be accretive this year, and if so how much.
Michael Balmuth - Vice Chairman and CEO: On the first part of that question regarding dd's, we don't disclose dd's financials separately mainly because the business just isn’t material to the overall size of the corporation, but I would make some comments. We're very happy with dd's performance. One thing I'll call out is like Ross, dd's has benefited over the last few years from lower inventory levels. By controlling inventories, we've really been able to drive the proportion of fresh merchandise that the shopper sees at dd's and that's also helped with margin. So overall we're pretty happy with the trajectory of that business.
John G. Call - Group SVP and CFO: And relative to the profitability, we're happy, like Michael said, with the four-wall contribution and it does tend to be slightly accretive as it was last year.
Dutch Fox - FBR Capital Markets: And that's included in your existing guidance?
John G. Call - Group SVP and CFO: That's correct.
Operator: Ike Burochow, Sterne Agee.
Ike Burochow - Sterne Agee: Just wanted to touch on some of the investments that you'll be making I guess towards the end of this year in terms of the two new distribution centers that will be going up. Can you remind us the timing of when those will start to come into play and if there will be any impact on the P&L in terms of any incremental expenses? And if there are, would that be towards the end of this year, the beginning of next year, and just kind of how to think that through?
Michael Balmuth - Vice Chairman and CEO: Sure. So CapEx this year is planned at about $670 million. If you remember that is up pretty significantly from the $424 million we spent last year. The biggest driver of that is around the two new distribution centers that we are building. They are scheduled to open one in 2014, the first part of 2014 and then the other in 2015. So, as it relates to the 2013 P&L there is no impact.
Operator: And we have no further questions at this time, I'll turn the call back to our presenters.
Michael Balmuth - Vice Chairman and CEO: Thank you. And thank you for joining us today and your interest in Ross Stores. Have a great day.
Operator: And this concludes today's conference call, you may now disconnect.