- For June the company is targeting comparable store sales to grow 1% to 3% on top of a strong 4% gain in the prior year.
- With inventory management driving fast returns and lower markdowns the company expects to end the quarter with less clearance than last year. So because July is typically a transitional clearance driven period, the company has planned same store sales that month to be flattish to the prior year.
- Operating margin is expected to increase about 20 to 60 basis points for a forecasted range of 6% to 6.4% compared to 5.8% last year.
- The company is planning stronger gains in gross margin during the second quarter, though it expects that to be partially offset by an increase in selling, general and administrative costs as a percent of sales. 2007 second quarter results included income from insurance proceeds related to a store loss and a lower than planned settlement for a legal matter that combined added about 25 basis points to last year’s second quarter operating margin. Interest income for the second quarter of 2008 is planned to be approximately $500,000 and tax rate is expected to be about 39%.
- The company estimates weighted average shares outstanding of about $132 million.
Fiscal 2008 Outlook
Based on second quarter guidance the company is projecting earnings per share for fiscal 2008 to be in the range of $2.19 to $2.29 for a forecasted growth of 15% to 21% over $1.90 in fiscal 2007.
Key questions from the first quarter earnings call conducted by Ross Stores, Inc. on May 21, 2008.
Jeff Black (Lehman Brothers): Where specifically are you seeing improvement or better traction in the ladies business?
Michael Balmuth: We are starting to see traction in the Misses. We have performed well in dresses. There is a national trend in dresses and we are capturing more than the average in that. We are pleased with that. We are seeing movement in our assortments and costs in our business, both in Misses and Special Sizes. It is moving. It is a slow move, but getting better. Juniors, we planned conservatively and the results have been much in line with our conservative plans and on a comparable basis are considerably down. That was our strategy going in.
Jeff Black (Lehman Brothers): The inventory came in lower than thought. Do you expect to see you build more inventories in the second quarter and in the back half of the year?
John G. Call: We ended the quarter below where we had planned the quarter. As we look forward, inventory levels are planned to be down high singles to low double digits and moderate more to the high, high singles levels in the back half.
Brian Tunick (J. P. Morgan): With the May comp guidance and with your outlook to June, any thoughts of the stimulus cheques that everyone is going to be getting?
Michael B. O’Sullivan: The truth is we just do not know. There are so many things that affect our business – supply, weather, gas prices, rebate cheques – it is hard for us to pull that out. Having said that, we are students of our business so we have gone back and looked at previous occasions where there have been similar rebate cheques. So in 2001, for example, there were 90 million rebate cheques issued between July and September. The back half of 2001 your ad comps did well, but I warn you that was off a soft prior period in 2000 and, 9-11 was right in the middle of that. It is hard to parse that out and figure out what exactly the impact was. We think it is going to be good, but it is hard for us to quantify. That is the rebate cheque side.
Brian Tunick (J. P. Morgan): Could you give update on the micro merchandising roll out or the systems initiative that you are expecting to see in the second half?
Michael B. O’Sullivan: We are about to launch the pilot business in the micro-merchandising. There are two businesses that we are piloting the tools and processes with which represent about 15% of our business. We will then move to some other major businesses in 2009 which would represent about 50% of our business, and then the balance of the businesses would be in 2010.
Paul Lejuez (Credit Suisse): Are you seeing anything different in the California market in terms of transactions per ticket and in terms of shopping?
Michael B. O’Sullivan: We do regular research on our customers and that allows us to look at over a longer time horizon where our customers are coming from and we know that historically our customers have come from everywhere. Our customers continue to shop at every store. They are only loyal to one thing and that is a bargain. That is what we try and focus on.
David Mann (Johnson Rice & Company): Was the corporate expense leverage all due to the comp or were there some areas where you had some unusual cost savings for control?
John G. Call: On that statement, there are some timing issues in the quarter. In the second quarter SG&A will be up given that we are up against the 25 basis points of income that we had last year.
David Mann (Johnson Rice & Company): How some of the underperforming stores are doing?
Michael B. O’Sullivan: In the first quarter we were behind the train. It is hard for us to go running to long-term sustainable conclusions from that.
Jeffrey Klinefelter (Piper Jaffray): One of the dd’s stores performed better than expected. Where those stores opened?
Michael B. O’Sullivan: Last year we doubled the sizes of dd’s chains. We added 26 stores. The vast majority of those were outside of California, which is the first time we opened dd’s outside of California. As we said on previous calls, we were disappointed with that performance. They did not perform anything like as well as the initial 26 stores that opened that had performed. In the first quarter they performed better and we are happy with that. We can make some adjustments to the assortments.
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