- Earnings per share for the six months ended August 4 2007 rose 16% to 85 cents per share from 73 cents per share for the six months ended July 29, 2006.
- Net earnings were $117.9 million compared to $104.6 million for the prior year period. Sales for the six months ended August 4, 2007 were $2.855 billion, up 10% over the prior year.
- Comparable store sales grew 1% on top of a 5% gain in the first half of 2006.
- The company added 46 stores for an updated total of 817 stores in 27 states.
- Same-store sales gains at dd''s during the first six months of the year were in line with plan. However, some of the new dd''s locations that were opened earlier this year are ramping at a slower than expected pace. The company believes that their performance will improve as it builds recognition and market presence in these new communities.
- The company repurchased 3.1 million shares of common stock for an aggregate of $101 million.
Third Quarter 2007 Outlook
- The company expects the packaway timing issue to reverse in the third quarter and remains on track to achieve about a 10 basis point decline in distribution costs for fiscal 2007. This expected improvement is on top of a 35 basis point reduction in 2006.
- The company continues to pursue a number of merchandising initiatives for the fall season. The objective is to reinvigorate core misses and men''s assortment with a younger, fresher focus while strengthening the overall mix with a wider range of highly recognizable brands. In addition, the company sees opportunities to strengthen accessories department with an updated mix of labels, especially in the handbag category. The company is working to expand and improve fine jewelry assortment and other gift-giving merchandise throughout the store. While the company believes these initiatives will gain traction as it moves through the fall season, it is difficult to forecast their benefit in what may become a more competitive retail climate.
- Although outlook for the year is still for respectable growth, the company is reducing estimates for the second half given the risk posed by macro economic factors, recent results and projections from other retailers, plus own sales trend that slowed versus planned beginning in mid July. Although the company hopes to perform better in light of these issues, it believes it is prudent to manage business with more conservative sales and margin assumptions for the balance of the year. For the 13 weeks ended November 3, 2007, the company has reduced previous forecast for a 3% to 4% increase in same-store sales to 1% to 3%. Earnings per share for the third quarter are projected to be in the range of 33 cents per share to 37 cents per share.
- Total sales are expected to grow about 9% to 11% for the third quarter of 2007 compared to the third quarter ended October 28 2006.
- The company is forecasting about 31 net new stores during the period, including 24 Ross Dress for Less locations and seven dd''s DISCOUNTS.
- New stores in 2007 are scheduled to open in October compared to September last year. The company estimates that the sales tax holiday shift in Florida and Texas will benefit August comparable sales by about 1%, so the company is planning comparable store sales on a day-for-day basis versus the prior year to be up 2% to 4% in August and up 1% to 3% in both September and October.
- Operating margin is expected to be in the range of 5% to 5.5% compared to 5.2% in the prior year period. This range assumes pressure on gross margin from higher clearance inventory as the company enters the third quarter along with the potential for a more challenging retail environment during the period. As a reminder, the company is getting ready to take a chainwide full physical inventory in September. Last year, the third quarter benefited by about 2 cents per share from the true-up to the shrink reserve based on the inventory results. Current earnings forecast assume no improvement in shrink results from this year''s inventory. The company believes that continued focus on shortage control may contribute to some incremental improvement in the third quarter.
- Interest expense is expected to be about $1 million. Tax rate is expected to be about 38% and the company estimates weighted average shares outstanding of about 137.5 million.
Fourth Quarter 2007 Outlook
- The company has lowered same-store sales forecast for the fourth quarter ending February 2 2008 from 3% to 4% to an updated target of 1% to 3%.
- The company is projecting earnings per share to be in the range of 62 cents per share to 68 cents per share compared to 66 cents per share in last year''s fourth quarter. Last’s results included income equivalent to about 7 cents per share related to the 53rd week in 2006.
Fiscal 2007 Outlook
- The company is planning further reductions in selling store inventories, which are now forecast to be down in the mid single-digit percentage range for the back half of the year compared to the same period in 2006.
- With 45 dd''s now, the company is on track to reach goal of 52 stores in four states by the end of the year.
- By the end of 2007, the company expects to complete the remaining $99 million authorization under two year $400 million program authorized by board of directors.
- Even though it appeared that economic and competitive issues could affect the back half of the year, the company remains on track to generate respectable earnings per share gains in 2007.
- Based on updated quarterly forecast, the company is projecting double-digit earnings per share growth of 10% to 17% this year on a 52-week basis for a targeted range of $1.80 to $1.90. This compares to original guidance issued at the beginning of 2007 of $1.85 to $1.95.
- The company believes somewhat more conservative sales and gross margin assumption positions defensively in what could become a more competitive second half without limiting ability to hopefully deliver better results.
- The company expects that recent merchandise initiatives will begin to take hold as it moves through the back half and into 2008. The company benefits in tougher retail climates from increased opportunities for terrific buys on a wide array of attractive name brand fashions for the family and the home.
Key questions from the second quarter earnings call conducted by Ross Stores, Inc.on August 22, 2007.
Michelle Clark (Morgan Stanley): Can you breakdown the components of gross margin by basis point contribution during the second quarter?
John Call: Merchandise margin was flat, although we did benefit 10 basis points from a lower shrink accrual. We also had occupancy leverage due to lower pre-opening ramp than we anticipated on the Albertsons conversion. That was about 20 basis points on the plus side. We also levered buying comparables by about 10 basis points. The offsets to those pluses were our freight costs were 20 basis points to the bad, a continuation of our first quarter trend. As we look to the back half, we will anniversary those higher freight costs, so we will not have that drag in the third and fourth quarters. The distribution centers delevered by about 20 basis points and that relates to a certain packaway carrying cost that follow those goods through to when they sell. Our packaway levels were down from our first quarter to second quarter. Therefore, we got a hit at the P&L. That is a timing issue. We expect that to reverse in the third quarter as well. For the year, we expect the DCs to still be on plan to deliver about 10 basis points of improvement on top of the 35 basis points we got last year.
Michelle Clark (Morgan Stanley): What are you seeing in terms of August sales trends and have you seen any pick-up relative to July?
John Call: We expect August comparables to come in about 2% to 4%. In the first part of the year, we do not comment on minimum sales trends. We will give you more color on that when we report sales for August.
Michelle Clark (Morgan Stanley): What do you think is causing the slower than expected ramp at the dd''s locations?
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