This summary is based on the first quarter fiscal 2008 earnings call conducted by Ross Stores, Inc. (ROST) on May 21, 2008.
Management:
Chairman of the Board: Norman A. Ferber
Vice Chairman, President, Chief Executive Officer: Michael Balmuth
Executive Vice President, Chief Operations Officer: Gary L. Cribb
Executive Vice President, Chief Administrative Officer: Michael B. O’Sullivan
Senior Vice President, Chief Financial Officer, Corporate Secretary: John G. Call
Vice President of Investor Relations: Katie Loughnot
Key Investors Issues
- EPS were 60 cents per share compared to 48 cents per share last year.
- Net income rose to $79.5 million from $67 million in the prior-year quarter.
- Revenue rose 10% to $1.56 billion from $1.41 billion in the first quarter of 2007.
First Quarter Highlights
Earnings per share grew 25% to 60 cents per share from 48 cents per share for the 13 weeks ended May 5th, 2007.
- Results include a real estate settlement that added income equivalent to about 2 cents per share during the period.
- Net earnings were $79.5 million compared to $67 million for the prior year period.
- Sales increased 10% to $1.556 billion with comparable stores sales up a solid 3% over the prior year and ahead of original forecast.
The mid-Atlantic and Texas were the strongest geographic regions with comparable store sales up in the high single digits.
- California same store sales rose a respectable 2%.
- The company is pleased that it was able to leverage its solid sales gains into healthy profit growth in the quarter. Strong execution of merchandising strategies combined with strict inventory and expense management were the main drivers of ahead-of-planned earnings for the period.
- As a result, the company was able to realize larger than planned increases in operating margin, which grew about 45 basis points to 8.2%. Profit margins benefited mainly from better than expected improvement in merchandise margins, lower distribution costs as a percent of sales, leverage on corporate expenses, and income from a real estate settlement related to a store closure.
- Total consolidated inventories were down about 7%, which was lower than planned.
Average selling store inventories were down about 13% as the company ended the quarter.
- Pass away was about 36% of total inventories, which was flat compared to last year’s first quarter.
- As expected, the company opened 28 new stores, 26 Ross Dress for Less and 2 dd’s DISCOUNTS.
- Overall sales trends at dd’s DISCOUNTS were in line with forecasts, but the performance was mixed. While comparable dd’s stores posted increases over the prior year they were somewhat less than planned. This was offset, however, by the new dd’s stores that the company opened in 2007 which performed better than projected.
The company ended the period with $308 million of cash and short-term investments.
- Cash position is benefiting from reduced working capital needs as it operates the business on lower inventories.
- The company repurchased 2.5 million shares of common stock for an aggregate purchase price of $77 million. The company remains on track to complete half of new two-year, $600 million buy-back program for a total of $300 million this year. In addition, the company expects to complete this full two-year buy-back without taking on any incremental long-term debt.
The operating margin improved by about 45 basis points driven by a 40 basis point decline in selling, general and administrative costs and a five basis point improvement in gross margin.
- Merchandise to margin increased to about 15 basis points. Comparison versus the prior year was impacted by timing issues related to markdowns taken in the first quarter of 2007 that sold during last year’s second quarter. Because the company is on the cost method of accounting, markdowns do not reduce gross margin until they sell. So the company is forecasting stronger merchandise margin gains in this year’s second quarter compared to the higher-than-planned markdown activity in the prior year period.
- Higher freight costs related to fuel surcharges were offset by lower distribution costs which improved about 10 basis points. Both occupancy and buying costs experienced increase of about five basis points over the prior year.
- Selling, general and administrative costs in total declined about 40 basis points compared to last year’s first quarter. The real estate settlement benefitted the period by about 30 basis points. Deleveraging in store cost was more than offset by lower corporate expenses as a percent of sales.
- Store costs in the first half of 2008 are being pressured by the large number of new stores opened in 2007, including 26 new dd’s DISCOUNTS.
Interest income of $1.6 million was better than planned, benefitting mainly from higher cash balances resulting from the progress the company has made in inventory management that is driving fast returns, fresh receipts, and higher accounts payable leverage.
- As planned, earnings benefited from lower tax rate. With the adoption of FIN 48, there is now more variability in quarterly tax rates. The company continues to forecast tax rate for the year to be relatively flat to 2007 at about 39%.
- Buy-back program drove a 4.5% reduction in shares outstanding, leveraging earnings per share growth.
Second Quarter 2008 Outlook
- The company is projecting second quarter same store sales to increase 1% to 3% and earnings per share to grow16% to 27% for a targeted range of 43 cents per share to 47 cents per share compared to 37 cents per share in the prior year. The assumptions that support these projections include: total sales are expected to grow about 8% to 10% driven by a combination of new store growth and, as mentioned, a 1% to 3% increase in same store sales.
- The company is forecasting about 25 net new stores to open during the period, including 24 Ross Dress for Less locations and one dd’s DISCOUNT.
- The company is planning comparable store sales in May to increase 4% to 5%. This guidance reflects favourable weather across many of markets and an easier comparison versus May of 2007 when same store sales rose 1%.
