Ross Stores (ROST)

Q3 2012 Earnings Call

November 15, 2012 11:00 am ET

Executives

Michael Balmuth - Vice Chairman and Chief Executive Officer

John G. Call - Chief Financial Officer, Principal Accounting Officer and Group Senior Vice President

Michael B. O'Sullivan - President and Chief Operating Officer

Analysts

Rick B. Patel - BofA Merrill Lynch, Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division

Oliver Chen - Citigroup Inc, Research Division

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Paul Lejuez - Nomura Securities Co. Ltd., Research Division

Laura A. Champine - Canaccord Genuity, Research Division

David M. Mann - Johnson Rice & Company, L.L.C., Research Division

Marni Shapiro - The Retail Tracker

Roxanne Meyer - UBS Investment Bank, Research Division

Alex J. Fuhrman - Piper Jaffray Companies, Research Division

Mark K. Montagna - Avondale Partners, LLC, Research Division

Daniel Hofkin - William Blair & Company L.L.C., Research Division

Presentation

Operator

Good morning, and welcome to the Ross Stores Third Quarter 2012 Earnings Release Conference call. The call would 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 fiscal 2011 Form 10-K and fiscal 2012 Form 10-Qs and 8-Ks on file with the SEC.

And I'd like to turn the call over to Michael Balmuth, Vice Chairman and Chief Executive Officer.

Michael Balmuth

Good morning. Joining me on our call today are Norman Ferber, Chairman of the Board; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Group Senior Vice President and Chief Financial Officer; and Michael Hartshorn, Senior Vice President and Deputy Chief Financial Officer.

We will begin with a review of our third quarter performance followed by our outlook for the upcoming holiday season. After which, we'll be happy to respond to any questions you may have.

We are pleased with the strong sales and earnings gains we generated in the third quarter and first 9 months of 2012. Our better-than-expected results year-to-date were driven by our ongoing ability to offer shoppers a fresh and exciting array of compelling name-brand bargains for the family and the home. In addition, operating of stores on lower inventories while strictly controlling expenses continues to enhance profit margins. Earnings per share for the 13 weeks ended October 27, 2012, increased 14% to $0.72, up from $0.63. These results are on top of a 24% gain in last year's third quarter. Net earnings for the quarter grew 11% to $159.5 million. Sales rose 11% to $2,263,000,000, with comparable store sales up 6% following 5% growth in the third quarter of 2011.

For the 9 months ended October 27, 2012, earnings per share were $2.46, up from $2.01. These results represent a 22% increase versus a 24% gain last year. Net earnings for the period rose 18% to $550.2 million, up from $465.2 million for the first 9 months of 2011. Sales for the first 9 months of 2012 increased 12% to $6,960,000,000, with comparable store sales up 7% on top of a 5% gain for the same period last year.

Merchandising geographic trends were broad-based for the third quarter. Juniors was the best-performing category while the Southwest Texas and Florida showed the most geographic strength.

Earnings before interest and taxes in the 2012 third quarter grew to a record 11.3% of sales, up from 10.9% last year. As a percent of sales, higher merchandise margin, lower distribution cost and leverage on occupancy and general, selling and administrative expenses, were partially offset by a lower shortage benefit in the prior-year and increases in freight and buying cost. John will provide additional color on these operating margin trends in a few minutes.

As we ended the third quarter, total consolidated inventories were up 9% over last year, while packaway levels were 46% of total inventories compared to 43% at this time in 2011. More importantly, average in-store inventories were down 6% at the end of the quarter, and we continue to target selling store inventories to decline in the mid-single-digit range for the fourth quarter.

Now let's turn to dd's DISCOUNTS. Dd's continued to generate solid results in the third quarter with better than expected sales and profitability. Like Ross, dd's is benefiting from our ability to offer a wide assortment of terrific bargains while also operating the business on reduced inventory levels. We continue to expect dd's to generate improved growth in pretax earnings for 2012 compared to last year.

We also recently completed our store expansion program for the year, adding 31 new Ross and dd’s DISCOUNTS locations combined in the third quarter for a total of 80 new stores in 2012 as planned.

Now John will provide further color on our third quarter results and details on our guidance for the fourth quarter.

John G. Call

Thank you, Michael. Our 6% comparable store sales gain in the third quarter was driven by mid-single-digit growth in the number of transactions combined with a low single-digit increase in the size of the average basket. Operating margin grew by about 35 basis points in the quarter to 11.3% as 40 basis points of leverage on selling, general and administrative cost was partially offset by a 5-basis point increase in the cost of goods sold compared to the prior year. The slight increase in cost of goods sold consisted of 30 basis points of higher merchandise margin, 15 basis points of leverage on occupancy costs and distribution expenses that declined approximately 45 basis points, the latter was mainly due to favorable timing of packaway-related processing costs.

Read the rest of this transcript for free on seekingalpha.com

Copyright 2012 Seeking Alpha