Ross Stores, Inc.
Q3 2015 Earnings Call Transcript

Published: 20 Nov 2015

[Operator:]

Good afternoon, and welcome to the Ross Stores Third Quarter 2015 Earnings Release Conference Call. The call will 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 forecasts 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 2014 Form 10-K, and fiscal 2015 Form 10-Q, and 8-K as on file with the SEC. Now, I'd like to turn the call over to Barbara Rentler, Chief Executive Officer.

[Barbara Rentler:]

Good afternoon. Joining me on our call today are Michael Balmuth, Executive Chairman; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Executive Vice President, Finance and Legal; Michael Hartshorn, Group Senior VP and Chief Financial Officer; and Connie Kao, Senior Director of Investor Relations. We'll begin our call today with a review of our third quarter performance, followed by our outlook for the fourth quarter. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we are pleased with the better than expected sales and earnings growth we achieved in the third quarter. These results demonstrate that customers continue to respond positively to the wide assortments of fresh and exciting bargains we offer throughout our stores. Earnings per share for the third quarter grew 15% to $0.53 on net earnings that rose 12% to $216 million. Sales increased 7% to $2.783 billion with comparable store sales up 3% on top of last year's 4% gain. For the first nine months of fiscal 2015 earnings per share grew 15% to $1.85 while net earnings rose 12% to $757 million. Year-to-date sales increased 8% to $8.689 billion with comparable store sales up 4%. dd's also posted better than expected gains in sales and profits for the quarter and year to date period. Mens was the strongest category at Ross during the quarter while the Midwest was the top performing region. Third quarter operating margin increased 30 basis points to 12.1%. These results were above planned and primarily driven by higher merchandise margins. As we ended the quarter, total consolidated inventories were up 14% over the prior year with packaway levels at 48% of total inventories compared to 42% last year. Average in-store inventories at quarter-end were down approximately 1% versus last year. As planned we completed our 2015 store opening program during the third quarter with the addition of 19 Ross and 7 dd's Discount locations for grand total of 84 new stores this year net of closure. We expect to end fiscal 2015 with 1,274 Ross and 172 dd's Discount stores. Now, Michael Hartshorn will provide further color on our third quarter results and details on our guidance for the fourth quarter and the year.

[Michael Hartshorn:]

Thank you, Barbara. Let's start with our third quarter results. Our 3% comparable store sales gain was driven by a combination of higher traffic and an increase in the size of the average baskets. As Barbara mentioned, third quarter operating margin was better than planned, rising 30 basis points from last year to 12.1%. Cost of goods sold was declined 45 basis points driven by a 45 basis points increased in merchandise margins and 5 basis points improvement each in freight and buying cost. This was partially offset by 10 basis point increase in distribution expenses related to recent infrastructure investment that were partially offset by the favorable timing of packaway related cost. Selling, general and administrative expenses during the period increased by about 15 basis points due impart the higher way wages. During the quarter, we've repurchased 3.6 million shares of common stock for total purchase price of $179 million. Year-to-date we have bought back a total of 10.4 million shares for an aggregate price of $530 million. We remain on track to repurchase a total of $700 million in common stock for the year under the two-year $1.4 billion stock repurchase program approved by the Board of Directors in February of this year. Let's turn now to our fourth quarter guidance which remains unchanged from what we’ve communicated in August. For the 13 weeks ending January 30, 2016, we continue to expect same-store sales to be flat to up 1% on top of a strong 6% gain last year, with earnings per share projected to be $0.60 to $0.63 compared to $0.60 last year. The operating statement assumptions for our fourth quarter guidance include the following; total sales are forecast to grow 4% to 5% on the previously mentioned comparable store sales forecast of flat to up 1%. If sales perform in line with this guidance, operating margin is projected to be 12.6% to 12.8% versus 13.1% in the prior year. The forecasted decline versus last year is mainly due to our expectations for higher distribution expenses from recent infrastructure investments and the timing of packaway related costs. Net interest expense is estimated to be about $5 million. Our tax rate is planned at approximately 37% to 38%. And we expect average diluted shares outstanding to be about 403 million. Based on this guidance we now project earnings per share for the full year to be in the range of $2.45 to $2.48, up 11% to 12% over $2.21 in fiscal 2014. Now I’ll turn the call back to Barbara for closing comments.

[Barbara Rentler:]

Thank you, Michael. As we enter the fourth quarter we are pleased with our fresh and exciting assortments of name, brands, bargains and gifts for this holiday season. Despite outperforming our sales and earnings targets throughout 2015, there are number of factors that still cause us to be cautious when forecasting the fourth quarter. First, we are up against our toughest sales comparison of the year. A Michael mentioned, comparable store sales in last year’s fourth quarter were up a robust 6%. Second, there is ongoing uncertainty in the macroeconomic environment and third, based on the current retail landscape we expect the upcoming holiday season to be highly promotional. As a result, while we always hope to do better, we believe it is prudent to maintain a conservative posture. Over the longer term, we remain confident about our prospects for respectable sales and earnings growth. This is based on two key factor, our believe that off price will remain a strong performing segment especially during consumers ongoing focus on value and our own proven ability to offer our customers compelling bargains on an everyday basis. This is and always will be the key to the success in our business. At this point, we like to open up the call and respond to any questions you may have.

[Operator:]

[Operator Instructions] The first question is from Ike Boruchow with Wells Fargo.

[Ike Boruchow:]

I guess my question -- I wanted to focus on the packaway number 48% of inventory, it seems like it’s the highest it's been in about two years give or take. Just kind of curious your view of the environment -- the buying environment out there, it sounds like a lot of vendors are cancelling orders and the department stores aren’t doing so well. Just your view of the environment and your packaway strategy and how you look at that right now?

[Barbara Rentler:]

Well the buying environment, we continue to be a really strong supply of excess goods in the marketplace. As it pertains to packaway, packaway is typically the best bargains we carry on merchandise. We go in the market, we see what’s available, we see what the great deals are and then we go in and pack it away. So we don’t focus so much on the number itself. Ike, what we focus on is the value and the brands that we can offer the customer.

[Operator:]

Your next question is from Paul Lejuez with Citi Research.

[Paul Lejuez:]

Could you maybe talk a little bit more, give us more detail on regional performance specifically Texas and the oil impacted markets and also curious just higher level loss versus dd’s and then also the performance of those two within those Texas and other oil mid-markets? Thanks.

[Michael Hartshorn:]

This is Michael Hartshorn, the sales performance was fairly broad-based across regions as we mentioned the Midwest was our strongest region which has been true over the past seven quarters, California our largest region performed in line with the chain and then as far as Texas, Texas was in line with the chain average for the quarter.

[Paul Lejuez:]

[Multiple Speakers] versus dd’s?

[Michael Hartshorn:]

Your question about dd’s, as Barbara mentioned in her remarks we posted better than expected sales in profits. We don’t typically break dd’s down to a regional level, but overall we were very happy with dd’s performance.

[Paul Lejuez:]

Got you. Michael, you’ve had pretty positive to say about dd’s for several quarters now. Are you at a point where you might feel more comfortable accelerating the growth of that concept beyond doing let’s say in the low 20s per year. Can that be accelerated as we think about next year?

[Michael Hartshorn:]

I think it’s unlikely. We feel that for several years we’ve been very happy with how dd’s business developed and we feel very good about the business over the longer term. But we open as you said just over 20 stores a year at dd’s but chain is now run about 170 stores. So 20 stores a year on a base of 170 is still relatively large incremental addition every year. So we think it’s likely that it will in that ballpark, 20 to 25 stores a year.

[Paul Lejuez:]

Got you. And just piggyback one, last one of off Ike’s question. On the packaway merchandise, can you talk about the performance of that product, are you seeing let’s in this most recent quarter, is it meeting your sales and merch margin expectations? That’s it from me, thanks.

[Barbara Rentler:]

Well packaway physically represents the best bargains we have so we feel that in third quarter this merchandise likely benefited sales and we expect it to help our sales in the fourth quarter as well.

[Operator:]

Your next question is from Kimberly Greenberger from Morgan Stanley.

[Kimberly Greenberger:]

Great, thank you. I will add my congratulations to a very fine quarter. I wanted to just follow up quickly on Paul’s question on packaway. I think that packaway is probably a more broadly used term in Ross than maybe some of the other appraisers [ph]. Can you just confirm the composition of packaway, is it strictly goods that are shipped off and put into your packaway warehouse or do you also consider packaway goods that are sitting ready for the current season distribution to stores that are maybe partially already distributed in the current season, in other words goods in a variety of distribution centers and not necessarily shipped off in stores for six months, that the bigger representation of the product that you’ve got held in your distribution center, does that make sense?

[Barbara Rentler:]

More than likely, I think.

[Michael O'Sullivan:]

Let me have a crack at it Kimberly, packaway, we think that packaway has good aftersales, they are packed away in our warehouse is to be released for sale in subsequent months or even next season. So I don’t know if that helps, yes, does that answer your question?

[Kimberly Greenberger:]

It does. Are there examples where you actually have a current season order, you partially distribute let’s say 70% of the goods to existing stores, help hold back 30% of your distribution centers an example, and then use that to fill in based on fill trends, would you consider that 30% that you hold back part of your packaway or would that be just inventory in the distribution center that you would not put in you packaway, in your packaway calculation?

[Michael O'Sullivan:]

As long as they haven’t been released for sale we treat as packaway. Once it is released for sales, then it counts as part of our selling store inventory.

[Kimberly Greenberger:]

Sorry Michael go ahead.

[Michael O'Sullivan:]

I was just going to make a point that I guess in Barbara's remarks she broke out total inventory. So the way to think about it is our total inventories are up 14%, add selling store inventory the inventory that’s actually in the store for sale were down slightly, that’s a key metric for us because with a 3% comp and within store inventory down slightly that means that we are getting top returns and better merchandise margin.

[Kimberly Greenberger:]

Okay, great. So if I should divide your total inventory bucket, there is a piece of it that’s in-store and the other piece that it does packaway. Is there a third bucket of inventory that would be neither considered in store or packaway that you would classify?

[Michael O'Sullivan:]

Yes, Kimberly so there is a couple of buckets. You mentioned there is packaway inventory, there is store inventory and there is also in-transit inventory on the way to the distribution center. As we mentioned total inventory was up 14% and packaway was up at 48% of total inventories. In-transit inventory for us was actually down versus last year because we are up against the start of our mitigation efforts because of the slowdown in the quarter. So those are the primary three buckets.

[Kimberly Greenberger:]

Okay. So anything that’s in your distribution center that is not available for sale would be included in the packaway bucket.

[Michael O'Sullivan:]

I will try, anything else in our distribution center is on its way to -- it’s been processed on its way out the door. And that would not forward would not count as packaway.

[Kimberly Greenberger:]

Okay. Great. So as I think about the wage increase, this is a first quarter really where we’ve had any -- this is the first full quarter I think of the wage increase. I think you said in your prepared remarks of the 15 basis points increase in SG&A, it was largely driven by wages. Michael, I am wondering if you can just give us was it the majority, was it the full piece and were there any other moving parts in the SG&A?

[Michael O'Sullivan:]

The primary difference and the reason we called out wages is typically we'd say 3% is our leverage point and that as there is always timing differences from quarter-to-quarter. A part of that deleverage was due to wages and there is some other timing differences that were not as meaningful longer term we still believe that we can lever at the 3% constantly.

[Kimberly Greenberger:]

Would that your expectation in 2016 as well just given the wage increases that we have going through that I guess up probably 3% comp you would be able to leverage?

[Michael O'Sullivan:]

Yes I mean it's a good question we are obviously in the midst of our budget cycle today and would expect to be able to provide some more color on the fourth quarter call. As we have previously mentioned we took our minimum wage up to $9 across the chain this year and those adjustments along with any offsets are included in our guidance this year for 11% and 12% EPS growth. We do view the labor markets as dynamic we think as the economy improves over the next couple of years there will be additional wage pressure out there but like this year we will do our work and where we can we will find efficiency throughout our business to attempt to mitigate the impact of any cost pressures we have in our business.

[Kimberly Greenberger:]

And do you think there is a possibility that part of your traffic increase is actually that some of the consumers who shop at Ross Stores are seeing the benefit of some of those wage increases or is it very difficult for you to sort of draw that loop and come to that conclusion?

[Michael Hartshorn:]

It’s the later Kimberly. Conceptually we think if the customer has more money in their pockets that's a good thing for us. But very hard for us to sort of dissect that and split it out in terms of to what degree that’s driving our comp [ph].

[Kimberly Greenberger:]

Understood. Great quarter and good luck to you for the holiday.

[Operator:]

The next question is from Michael Binetti from UBS.

[Michael Binetti:]

Hey guys congrats on a great quarter. I think as you look ahead to 2016 you said you think you can hold the 3% leverage point. There is obviously the well documented labor inflation that you guys have already starting to get into or the full year than next year, maybe some more. Do you have merchandize margin room on your side to offset that top side margin compression this year or how should we think about merchandize margin as one of the leverage do you have to toggle next year?

[Michael Hartshorn:]

I think at this point Michael will be in a better position to answer questions on 2016 in our fourth quarter call.

[Michael Binetti:]

Okay. Maybe then as we just kind of ask something about the competitive backdrop here I think you mentioned, it looks like it stacking up to be a very promotional holiday and very competitors, as you look at the environment you’re clearly gaining share of traffic and certainly with the industry backdrop it would seem that a strong value messenger is continue to drive those share gains in the fourth quarter and then into the medium term. What do you think is the right thing to do with IM user with starting price, do you think it's a good idea strategically maybe even dig a little deeper on value at this point or do you think the merge margin has maybe where you prefer you'd prefer to see some of the flow-through come from?

[Michael Hartshorn:]

Michael I don’t think we'd get into that level of detail in terms of how we go after the business but suffice to say that we agree with you. We think what's really driving the retail environment right now is that the customers is looking for value and our focus is to provide the best margins we can, put the best bargains in front of the customer and that's what will drive the business.

[Operator:]

The next question is from Laura Champine with Cantor Fitzgerald.

[Laura Champine:]

Good afternoon. Was just wondering if you could comment on strengthen strength in categories, was home stronger then apparel, any particular strengthen women's versus men's or anything you can say there on category strength?

[Michael Hartshorn:]

In terms of merchandize performance home and apparel were fairly well they are both in line with the chain overall and frankly the only other call out we say is what we said in the comments as men's was the strongest performing merchandize category.

[Operator:]

The next question is from Oliver Chen with Cowen and Company.

[Oliver Chen:]

The merchant margins were really impressive. Could you just elaborate on the main drivers I think it probably has something to do with your low levels denser [ph] inventories and mark down levels? I'm just sorry inventory level was also very impressive are you expecting that's the kind of continue to be negative and then I'm just curious about how that will trend just because the momentums has been so strong at your comp plan?

[Michael Hartshorn:]

Sure, Oliver. So we outperformed the high end of our comp sales target during the quarter, so that's meant that we had faster inventory turns resulting in lower mark downs that was also help by the fact that we ran at with inventories down about 1% during the quarter. We also benefitted from our ability to take advantage of buying opportunities in the market plays and in addition we did see some benefit from ongoing improvements in our inventory shortage we typically take our physical inventory in the third quarter. So, all of those contributed to the better than planned merchandise margins during this quarter.

[Oliver Chen:]

Thank you.

[Michael Hartshorn:]

In store inventories for the fourth quarter we're again planning them to be down during the quarter, so that should answer the question.

[Oliver Chen:]

And you guys have been ahead of the curve with booking about the marketplace from the environment that's happening. Were August, September, October steady in cadences or was there was a fair degree of volatility that you were seeing in the way that consumers behaving?

[Michael Hartshorn:]

For us, relatively steady throughout the quarter.

[Oliver Chen:]

Okay. Now last question was the comp looked nicely driven by this healthy composition between traffic and basket, what's happening with basket, that's enabling you to have that momentum, is that the balancing that you think will continue, as you look forward on a medium and longer term basis between traffic and both baskets?

[Michael Hartshorn:]

So Oliver, as you mentioned 3% comp was driven by both higher traffic and an increase in the size of the average basket. The higher basket was a combination of higher unit per transaction and also higher AUR. I mean for us, the way we do that is that we've been successful delivering great bargains to the customer and that's the way we think about it, we don't look at the composition, when we’re planning our comps.

[Operator:]

Your next question is from David Mann with Johnson Rice.

[David Mann:]

If you pointed this out but merch margin expectation within your fourth quarter guidance, how should we think about that?

[Michael Hartshorn:]

I think at this point David if we perform ahead of plans like we did in a third quarter I think our expectations would be that it’s up a bit over the last year.

[David Mann:]

Okay. And then in terms of the packaway impact on distribution cost, I think you suggested that there was a benefit in the third quarter, how many basis points would that have been?

[Michael Hartshorn:]

We didn't call it out separately and we did call it out obviously the DC's, we said DC's are going to be a drag on the back half with the center value this year about 30 basis points but we didn't call out the packaway pieces of it.

[David Mann:]

And in term of what you're thinking that in the fourth quarter in your guidance about that packaway impact on distribution cost, how should we think about that or are you assuming packaway normalizes to some extent as percentage?

[Michael Hartshorn:]

Yes, our guidance is -- it's a good question. Our guidance assumes that it does normalize by year end. We said overall operating margins we're going to be down 30 to 50 basis points primarily driven really by three things, one is the comp at flat to 1%. But DC cost that would de-lever because of the infrastructure investments and the timing of packaway related costs.

[David Mann:]

And could you quantify how much that timing effect was, would you be willing to do that?

[Michael Hartshorn:]

No, we didn't call it out

[David Mann:]

Okay. And then last question on the home side of the business, I know you've been making great strikes there with some outperformance and some of the recent quarters. I guess this quarter is more in line or at least or three of the last four quarters, I think that was the case. Are you at a point now where you think that some of the benefits there have more stabilized or do you still think there is some opportunities to drive some outperformance?

[Barbara Rentler:]

We still feel good about home. We fell like we'll well position for holiday for the fourth quarter and we feel that in future '16, '17, there is still room to grow there.

[Operator:]

Your next question is from Lorraine Hutchinson with Bank of America.

[Lorraine Hutchinson:]

Thank you. Good afternoon. I wanted the follow up on the higher AUR during the quarter, is there a mix shift happening there, what's driving the tickets higher?

[Michael Hartshorn:]

Really two things, one because we operate with less inventory, it means that we had less clearance. So that drives of course a portion of the AUR increase and then there is always mixes by business that contributed.

[Lorraine Hutchinson:]

And then can you quantify the shortage benefit from the third quarter?

[Michael Hartshorn:]

So, of the 45 basis point improvements last year, it's about a little less than a third.

[Operator:]

Your next question is from Brian Tunick with Royal Bank of Canada.

[Brian Tunick:]

I guess first question was on the category side, did you guys say Mens was your strongest category, I don't think I’ve heard that in quite some time, is there any comment you can put around that and is that because the either juniors or women's is slowing just curious what you're reading into that with a great buys or something like that and then maybe in some more context on the Midwest stores I know they continue to lead the chain here, is that how the new store maturity curve is playing out, is that the micro merchandising, what are you learning from that as you think about your next markets and when could we hear about a new market in the next year or two, thanks very much.

[Barbara Rentler:]

Brian as a pretends to Mens no, for years we had difficult business in Mens but over the last couple of years we continue really just to just to improve our execution. So we’re just literally doing a better job than we had done before. So our Mens business we feel pretty good about.

[Michael O'Sullivan:]

And then Brian on your question about Midwest, so yes, we’re very happy with performance in the Midwest, I think Michael Hartshorn had mentioned earlier that actually sort of past seven quarters the Midwest has been one of the top performing regions. When we entered the Midwest just over three years ago, we said that we expected it to be a very successful business overtime and with any progress that we’ve made thus far and that reinforces our confidence and believe in. In terms of additional new markets, the Midwest is as you’ll appreciate is a pretty big area and there are lots of individual market within the Midwest. So our focus right now and probably for the next few years is going to be to build our presence in this market in Midwest.

[Operator:]

The next question is from Bob Drbul with Nomura.

[Bob Drbul:]

Good afternoon, just a couple of quick questions. The first one is, during the quarter the environment in terms of the promotional level or activity from the competition from the competition, did you see any changes then the quarter progress? And I guess you didn’t really change at all the fourth quarter prospects in terms of guidance or your plans, so my question is has the environment at all given you the thoughts around changing it in terms of pricing umbrella from department stores probably being a little bit more promotional as you think about your prospects for the fourth quarter?

[Michael Hartshorn:]

I’ll handle the second piece of your question Bob on the fourth quarter, I think as Barbara has outlined in her remarks, we think it make sense to be relatively conservative in the fourth quarter in the ongoing economic uncertainty; secondly the environment looks like it will be fairly promotional and some of that is based upon just what we’re seeing in terms of the recent performance in department stores those reports to be at the same, this could be by commercial in fourth quarter. And then as the final point for customers is important is that we’re up against the 6% comp last fourth quarter, we reported really as a terrific 6% comps so we’re up against that number. The other point I would make is our business, we typically plan our business relatively conservatively, that’s kind of probably the first bullet point in our play list, we plan the business conservatively and then we know we can shape the business as the sales of that, so I think -- we think it's best to plan conservatively but then we hope to do better.

[Barbara Rentler:]

So just as it pertains to the promotional level during the quarter, it actually was pretty promotional during the entire quarter. It's not like there were couple of events the department stores added in October, but actually quite frankly it's been promotional since Q2 and just kind of came across through back-to-school and then increased I’d say slightly in October.

[Bob Drbul:]

And then in terms of categories, as the -- can you just talk about how your cold weather categories are performing and how you're positioned there? And if you can just give us an update in terms of what you're seeing from the business in terms of the handbags and accessories category?

[Barbara Rentler:]

Cold weather has been I would say difficult, I mean it was difficult in October, we have relatively conservative plans in cold weather, we chase part of that business at the back end of season. So we can adjust as we come along the way, but it did start out slower than we would have liked. In terms of handbags and accessories, the business is still behind the chains performance and we’re still working away for that.

[Operator:]

The next question is from Marni Shapiro with The Retail Tracker.

[Marni Shapiro:]

Congratulations. Just a question on dd's, so has Michael been running dd's all this time and will he stay onboard to transition buying enroll and for how long will he stay onboard? And are there any other leadership positioned open at dd's that you need to fill at this point?

[Barbara Rentler:]

So Michael, dd's has reported Michael for this period of time, Michael, Brian will report directly to me, Michael will be evolved in -- heavily involved in this transition of Brian into the company and there are no other senior management jobs open at dd's at this point.

[Marni Shapiro:]

And then just on the tropic side, have you guys seen traffic still increase or flat at Ross and dd's?

[Michael Hartshorn:]

They are up in both during the quarter.

[Operator:]

The next question is from Mike Baker with Deutsche Bank.

[Mike Baker:]

Thanks. So I was just curious the [indiscernible] they seemed like they got really got hit with a lot of heavy inventory because it was kind of warm. So it seems like they are worse off now than they thought they were three months ago, yet you haven’t changed your guidance. So I guess did you predict -- correctly predict how bad it would be for the department stores or is there some other reason why you wouldn’t change your guidance, so you're just doing that much better? And I guess related to that inventory is high, just as high as they are now at the end of the previous quarter, yet your margins are getting better not worse. So just curious how you're sort of bucking that trend and what that wouldn’t be the same in the fourth quarter?

[Michael Hartshorn:]

Let me answer the first part of your question Mike, question Mike about department store. When we think about our guidance for the quarter, a lot of factors go into it. Obviously, our influence in the third quarter, the outlook for the fourth quarter, the macro economy, our promotional we think is going to be -- and I would say as we look at this quarter that fact that are up against the 6% comp. So all of those things kind of go into the mixture for us to come with guidance for the fourth quarter. So I think I’ve tried answer your question. I don’t think I really understood your second question about inventories, could you just repeat that?

[Mike Baker:]

Yes, so one of the concerns is that inventories are high right now and so that leads to a promotional environment, and that might hurt your margins in the fourth quarter and that makes sense except I just point out that inventories were high at the end of the second quarter and they were also pretty high at the end of the first quarter I think due to the average department store inventories. At the end of the first, second and third quarter is up about 5% or 6% pretty consistently yet even with the high inventories throughout the year, your merchandise margins are getting better not worse. So is there a reason to expect that, that wouldn’t continue into the fourth quarter?

[Michael Hartshorn:]

I think it’s all about inventories, and I think it’s a combination of inventories and sales trend and at least what we have seen, we are using the same numbers, the data we’ve seen suggest that actually the sales trend hasn’t lived up to its people’s expectations. So although the inventory levels may not move that much from quarter-to-quarter but sales trend have deteriorated and that’s what could really drive it to be more promotional.

[Mike Baker:]

Okay, that’s helpful. If I had just one more longer term question. You guys always guide early start you had a 1% to 2% I can’t remember the last time you actually comped at something in that range. As I do my model out, is it probably more correct to think about your annual growth as something higher than that typical guidance probably in the 3% to 4% range, how do you guys really think about it longer term?

[Michael Hartshorn:]

I think we have described our longer term model as we believe that our long-term average comp should be in the region of 3%. We feel pretty comfortable of our ability to achieve that kind of comp number. And certainly if you look at the last 10 even further back 15 years, the data would suggest that that’s a reasonable expectation. Now in any given year it could be plus or minus 1 or 2 points in any direction depending upon the circumstances, the economic environment, the competitor environment, the comps were up against it. But I think if you are modeling in 3% on an average basis, I think that’s appropriate.

[Mike Baker:]

Okay, makes sense. One more I promise. How does this work, when inventories are high in the environment right now are you more likely to get the excess product from vendors because we are getting inventory pushed back to them or they’re not able to send it to the department stores or more likely to get directly from the department stores, in other words departments stores have already taken possession of it but now they are going to send it to you.

[Barbara Rentler:]

We actually buy the merchandise from vendors direct.

[Operator:]

Your next question is from Anne-Charlotte Windal with Bernstein.

[Anne-Charlotte Windal:]

Hi, good afternoon and congratulations. So this maybe a good [ph] point given the availability of goods on the market. But with competition increasing in the off-price space are you seeing any change in the competitive dynamics, are you seeing any of your competitors becoming more aggressive in terms of what they are willing to pay for some brands?

[Michael Hartshorn:]

Anne-Charlotte, not really no. I mean the new competition I think you are referring to that is too small to have any kind of impact. So no.

[Anne-Charlotte Windal:]

Okay, just had to ask. Thank you.

[Operator:]

The next question is from Neely Tamminga with Piper Jaffray.

[Neely Tamminga:]

Great, thank you. Hey Barbara I just wanted to follow back up on the appointment of Brian Morrow for the company. Coming from Stein Mart obviously more of a national brand presence that exists in that format relative to what dd’s currently has. So should we be reading into something around that in his chief merchandising experience or I would imagine anybody at this point -- your pick of the litter, like who would want to come work for Ross, right. So what specifically have you seen in Brian that’s going to be very specific and relevant for dd’s? Thank you.

[Barbara Rentler:]

Brian has a very deep broad-based experience and he has over 30 years of experience in variety of sectors including moderate department stores and most recently off-price retail. This experience along with his strong leadership skill we think he is really going to be a valuable resource to dd’s. Worrying about whether he can make the transition to a low to moderate customer? We don’t foresee that as any problem. We think he is a very good merchant in a good merchant can merchandise all area.

[Operator:]

The next question is from Matthew Boss with JP Morgan.

[Matthew Boss:]

So as we think about your square footage expansion profile from here. First, how are your more recent stores performing? And then second, what’s the best way to think about how many years left in the existing markets in the Midwest versus how we best should think about timeline for a Northeast entrance?

[Michael Hartshorn:]

So Matthew in terms of new stores I would say that we have been very happy with the performance of our new stores actually over the last several years and this year has been no exception, we’ve been happy with how they performed. Certainly this year, I can say for the last few years we have exceeded our initial sales plan. In terms of a time frame for new markets, I wouldn’t give you time frame at this point I think we have plenty of opportunity left and frankly in our existing market as well as in the request so I think our was busy certainly for the next few years.

[Matthew Boss:]

Okay great. And then just a follow up I mean you guys have been spot on with your call on the retail environment. In terms of the product availability that you are seeing I mean are there any particular categories of particular opportunity as it relates to some of the buys that you see coming in the pipeline?

[Barbara Rentler:]

Actually the supply is very broad base. It's a great time with that.

[Matthew Boss:]

Sounds like it. Best of luck.

[Operator:]

The next question is from Roxanne Meyer with MKM Partners.

[Roxanne Meyer:]

My first question is a follow up on inventory. I guess it’s a follow up on inventory, I want to appreciate what are your guardrails around inventory. In terms of how higher you are willing to grow inventory on an absolute basis relative to your sales plans. Does that have a limit how do you think about your inventory strategy in total?

[Michael Hartshorn:]

Sure. So Roxanne I think we think more -- I know we think about our inventory on a segmented basis. We think about in-store inventory which is really the inventory that's available in front of the customer, but we manage that very tightly. As we've talked about earlier on this call over the third quarter, I’m sure there is slight decline versus last year and that's what we look for, we look for some of the key sort of drive turns and therefore drive multi-improvement and margin improvements. And so that's how we think about the in-store piece of inventory. Separately, we think about packaway based upon what's available in the market place and if we see terrific opportunities in the marketplace our merchants are encouraged to take advantage of those and that means packing away those goods and if packaway rises over a period of time that's because we've seen great bargains in the market place that we like. So that's kind of how we think about in between the different pockets of inventory.

[Roxanne Meyer:]

Okay. So the buyers just has the ability to take advantage of deals in the market and it doesn’t seems like there is too many constraints around -- at some point you just have to get cut off but you are willing to extend yourself knowing that it's for future periods.

[Barbara Rentler:]

The buyers have plans, it's not just free-for-all they have their buying. There is a strategy, there is a plan, there is a plan by business segment of how much we think is appropriate. All that being said one of the benefits for model is that reflect able. So if we were to see a large amount of product and the classification or a business we weren’t planning on particularly driving and that product could help us drive the business, we would put money into that plan and we reflect. So that's just one of the benefits of being a new up rise business.

[Michael Hartshorn:]

Just one other on that Roxanne, is we do as you would expect, we have pretty significant control over what’s in packaway, so we control very carefully sort of the ageing of packaway how long it's allowed to stay in there, what kind of goods. But we manage elastics of that, as you would expect.

[Roxanne Meyer:]

Okay great. And then just curious on the traffic increases that you are seeing. Can you talk about what portion of the traffic is coming from new versus repeat buyers are they continuing to skew younger, are existing customers shopping more? I mean just some of that maybe the demographics behind that it would be great? Thanks a lot.

[Michael Hartshorn:]

The new customers that we have attracted frankly over the last several years demographically if they look a lot like our existing customers what they will have in common is they were all looking for great value, after great bargains. In terms of your point about the age we've always disproportionately attracted a slightly younger customers and that continues to be true. When you look at the growth of our junior's business overtime that's a good manifestation of that, but I would say that demographic for our new customers are pretty similar to the demographics from our existing customers.

[Roxanne Meyer:]

Okay great. Thanks and best of luck for holiday.

[Operator:]

The next question is from Jeff S. Stein with Northcoast Research.

[Jeff S. Stein:]

Sure. Barbara this was the first quarter then I could remember that you did not call out Junior's as the best or one of the best performing categories and I'm just curious anything notable around that is that customer spending less or suddenly Mens just exploded during the quarter?

[Barbara Rentler:]

Junior's perform slightly above the chain and was up against a very tough compare with that we had a couple of execution issues which we have corrected.

[Jeff S. Stein:]

And what would execution mean, is that -- would have been merchandizing or?

[Barbara Rentler:]

Wrong timing on some products.

[Jeff S. Stein:]

Okay. And real estate cost, what's going on there. It’s one thing to compete against to other companies for merchandize I'm sure there is plenty of that there is less availability when it comes to real estate are you seeing real estate cost go up and perhaps choice locations becoming more difficult to identify?

[Michael Hartshorn:]

Yes. I think we are pretty happy with the availability of real estate locations and, the range you're seeing there is a lot going on in the retail industry, not just in the power of retail but in other sectors office supplies, electronics, et cetera, which means that there is availability of real estate and we have the terrific teams over the years which enables to show greater patience performance on great deals. So, we're pretty happy within our progress.

[Jeff S. Stein:]

Okay. And one more quickly for Barbara, during that period where you got a lot of promotional activity going on and there is an overabundance of product, is there a chance for risk that packaway may not prove to be as greater value because perhaps you bought it six months ago at higher price and today you could [buy] it at much lower price?

[Barbara Rentler:]

So as packaway, we actually -- Michael talked about all the difference metrics we have to measure packaway. We actually constantly look at the values that we're having there now. The merchants when they put merchandise in packaway, they are thinking of it from a promotional perspective. So the packaway that we own today would have been packaway we would have bought end of Q2 and to Q3, when we've already seen that promotional environment coming across. So they know when they put in there that there has to be a variance for what's going on in the world. All that being said, if there's something in packaway that we didn't think was the right value, during our processes, we would captured that and there is a lot of sides around packaway and what’s in there, we've putted out and we would mark it down, we would move on. But really the headset for merchants with something in packaways, they have to feel comfortable that when they take it out, it's really is going to be a great branded bargains. And so there is a lot of sides and rules and questions around what that looks like before they putted into packaway.

[Operator:]

The next question is from Richard Jaffe with Stifel.

[Richard Jaffe:]

One more question on packaway, please. How long that something stay in packaway? What's the average life of its time in packaway, ballpark or some timeframe?

[Michael Hartshorn:]

Richard, it's about three to four months.

[Richard Jaffe:]

That's great and I assumed, you're going to be -- you are in a position to take advantage of looks like a tremendous amount of product in the marketplace as I assume cancellations are out there, I'm sorry

[Barbara Rentler:]

We're in a good position going in to what we would call a volatile climate. So we feel pretty comfortable with where we are.

[Richard Jaffe:]

Yes, I think volatile maybe a kind word, going on way unfortunately

[Barbara Rentler:]

No, it's okay.

[Operator:]

The next question is from Stephen Grambling with Goldman Sachs.

[Stephen Grambling:]

One quick follow up, which I guess is just on the cost efficiencies that you captured this year, can you just talk to some of the biggest buckets there and maybe you want to still left?

[Michael Hartshorn:]

We were looking everywhere. We're looking in non-pay role, pay role and we're looking for efficiencies throughout the business. So, I think we'll continue to do that, we're doing that in our budget process and we'll be able to give you an update in -- at the end of the year.

[Stephen Grambling:]

I’ll shoot one more in there, which is just there has been some investor concerned around one of your larger off price competitors going after low AURs. Clearly the overall comps -- reflected any impact, can you just remind us if you have seen any difference in comps by approximately to off-price period

[Michael Hartshorn:]

Steve, we always fight to tighten our business, we look at how difference stores are doing based upon characteristics like demographic, et cetera and frankly there is nothing to call out -- it's been broad based, it's been nothing that's really impact.

[Operator:]

The next question is from David Glick with Buckingham.

[David Glick:]

Most of my questions have been answered. I just wanted a follow up again on the Midwest, obviously that's a newer market for you and for most retailers it was the most challenging region because of very warm weather. I was just wondering if you could help me to understand how you can outperform in that market obviously when you turned your inventories faster, you're less relying on seasonal which gives you guys an advantage versus departmental stores but just a little more color on that, help me to understand that would be great. Thanks.

[Michael Hartshorn:]

So David, I would say that, we're always driving our business as a chain and actually regionally is having great product in the stores and I think, we feel very good about the assortment that we have in our Midwest stores and ultimately that really what’s driven our business parallel to past couple of years.

[Operator:]

There are no further questions. I will turn the call back over to Barbara Rentler for closing comments.

[Barbara Rentler:]

Thank you for joining us today and for your interest in Ross Stores. Have a great day.

[Operator:]

This concludes today's conference call. You may now disconnect.