Ross Stores, Inc.
Q4 2015 Earnings Call Transcript

Published: 2 Mar 2016

[Operator:]

Good afternoon, and welcome to the Ross Stores Fourth Quarter and Fiscal Year 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, fiscal 2015 Form 10-Q, and 8-K 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 fourth quarter and 2015 performance, followed by our outlook for 2016. Afterwards, we'll be happy to respond to any questions you may have. As noted in today's press release, we are pleased with our sales and earnings results for the fourth quarter, which exceeded our expectations despite the highly promotional holiday selling environment. Additionally, we faced our most challenging sales comparisons from the prior year. Our results were driven by the competitive values we offered on a wide assortment of name, brand, bargains and gifts throughout our stores. Earnings per share for the fourth quarter grew 10% to $0.66 on net earnings that rose 6% to $264 million. Sales for the quarter increased 7% to $3.251 billion, with comparable store sales up 4% versus on top of last years 6% gain. For the 2015 fiscal year, earnings per share grew 14% to $2.51 on top of strong multi-year increases. Net earnings rose 10% to $1.021 billion with comparable sales up 4% for the year. dd's DISCOUNTS also posted better than expected gains in sales and operating profits for both the quarter and the year as customers continued to respond positively to their value offering. Misses sportswear was the best performing merchandised category of Ross for the fourth quarter while the Midwest was the strongest region. Our fourth quarter operating margin of 12.7% was down from last year as improved merchandised margins and strong expense control were more than offset by the timing of packaway related cost. For the full year however we are pleased that operating margin increased 10 basis points to a record 13.6%. As we ended 2015, total consolidated inventories were up 3% over the prior year with packaway levels at 47% of total inventories compared to 45% last year. Average in-store inventories were down approximately 2% at year end. During the fourth quarter, we repurchased 3.2 million shares of common stock for a total price of $170 million. For the full year we repurchased 13.7 million shares for an aggregate price of $700 million. We expect to complete the $700 million remaining under our current two-year $1.4 billion program by the end of fiscal 2016. As noted in today’s release our board recently approved an increase in our quarterly cash dividend to $0.135 per share, up 15% on top of an 18% increase last year. The continued growth of our shareholder payouts reflects our ongoing confidence and the company’s ability to generate significant amounts of cash after funding our growth and the other capital needs of our business. We have repurchased stock as planned every year since 1993 and raised our cash dividend annually since its inception in 1994. This consistent record reflects our unwavering commitment to enhancing stockholder value and return. Now, Michael Hartshorn will provide further color on our 2015 results and details on our fiscal 2016 full year and first quarter guidance.

[Michael Hartshorn:]

Thank you, Barbara. Let's start with our fourth quarter results. Our 4% 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, while full year operating margin was up 10 basis points compared to last year, fourth quarter operating margin declined 45 basis points to 12.7%. Cost of goods sold increased 75 basis points in the quarter driven by a 100 basis points of higher distribution expenses due to the timing of packaway related cost that benefited earnings earlier in the year. Freight and buying expenses also rose 15 and 5 basis points respectively. These increases were partially offset by merchandised margin improvement of 35 basis points from the prior year and 10 basis points of lower occupancy cost. Selling, general and administrative expenses during the period improved by 30 basis points benefiting from strong cost control and leverage on the 4% comparable store sales increase. Our tax rate for the quarter was lower than expected due to the passage of federal tax credit legislation and also the favorable resolution of the state tax matter. Let’s turn now to our guidance for the upcoming quarter and year. Earnings per share for fiscal 2016 are forecast to be in the range of $2.59 to $2.71 up 3% to 8% from $2.51 in fiscal 2015. The operating statement assumptions for fiscal 2016 include the following. Total sales are forecast to grow 4% to 5% on a comparable store sales increase of 1% to 2%. We expect to add about 70 Ross and 20 dd’s DISCOUNTS locations, as usual these numbers do not reflect our plans to close or relocate about ten older stores. If same-store sales are in line with our guidance above 1% to 2% then we would project the operating margin for 2016 to be 13.5% to 13.7%. This forecast calls for a slight increase in merchandised margin that would offset some deleveraging on operating costs. Net interest expense is estimated to be $70 million; our tax rate is projected to be approximately 37% to 38%. We expect average diluted shares outstanding to be about $395 million. Capital expenditures in 2016 are projected to be approximately $425 million. And deprecation and amortization expense inclusive of stock-based amortization is forecast to be about $385 million, up from $346 million in 2015. Lastly, our guidance includes our plans to raise the minimum wage for eligible hourly associates to $10 per hour in the second quarter of 2016 up from the current $9 minimum. These wage adjustments will help keep us competitive in our hiring practices and enhance our ability to retain talented associates to provide the shopping experience our customers have come to expect. Let’s move now to our first quarter guidance. We are projecting same store sales to be up 1% to 2% and earnings per share to be flat to up 4% at $0.69 to $0.72. Following are the assumptions that support this range. Total sales are projected to increase 4% to 5%, we expect to open 22 new Ross and 6 dd’s DISCOUNTS locations during the quarter. First quarter operating margin is projected to be 15.0% to 15.2% compared to last years 15.7%. The forecasted decline is mainly from the timing of packaway related costs that benefited the first quarter last year and also the impact of a new distribution center that opened in the second quarter of 2015. In addition, net interest expense for the quarter is estimated to be about $4.5 million. Our tax rate is expected to be approximately 38% to 39% and weighted average diluted shares outstanding are projected to be around $400 million. Now, I’ll turn the call back to Barbara for closing comments.

[Barbara Rentler:]

Thank you, Michael. We are very pleased with our strong performance in 2015 as we were once again able to convert our better than expected revenue gains into solid double digit earnings per share growth. These results are due to the resilience of our off price business models and our testament to the talented people we have throughout our organization. They have demonstrated once again their ability to deliver compelling bargains to our customers which will always be the key to success in our business. As we move into 2016, we are well positioned to take advantage of the best opportunities in the market place. However, we continue to face our own challenging multi year sales and earnings comparison. And with the increasing uncertain and volatile macro economic climate, it doesn’t appear that the retail landscape will get any less competitive or promotional in 2016. So while we hope to do better, we believe it’s prudent to maintain a conservative posture when forecasting our business for this year. As we look ahead over the longer term, we remain confident in our ability to deliver average annual earnings per share gain in the low double digit percentage range. This view is rooted in our belief that the off price sector will remain a strong performing segment of retail especially given consumers ongoing focus on value. Equally important is our proven ability overtime to maximize our favorable industry position by delivering the exceptional values our customers have come to expect. At this point, we like to open up the call and respond to any questions you may have.

[Operator:]

[Operator Instructions] Your first question comes from the line of Michael Binetti from UBS. Your line is open.

[Michael Binetti:]

Hey guys, thanks congrats on a good quarter. Would you help us think about the timing shift that you pointed to with the merch margin up and the packaway I guess taking away a little bit of that merch margin upside that we saw and how to think about those dynamics as we go forward into the at least in the first half of 2016, please?

[Michael Hartshorn:]

Yes so as we mentioned on the call, Michael, its Michael Hartshorn. For the quarter, it impacted us by about 100 basis points and to walk through that timing of what happened during the year Q1 we got about $0.03 benefit last year. Q3, we got about $0.01 and then Q4 went $0.05 with the charged earnings. So as we think about it going forward in the first quarter as we called out in our guidance we did expect some headwind in the first quarter. It’s hard to predict how it will fall out during the rest of the year and that based on market availability of merchandise.

[Michael Binetti:]

Right. And it sounds like the -- you are pleased with the inventory available in the channel in the quarter as you head into the first half of the year, I’m trying to think about areas where perhaps that we’ll see as we walk around the stores here in the first quarter where are some of the areas that we are going to see that you found to be more readily available perhaps than you thought as we get into the year?

[Barbara Rentler:]

Actually I think the -- I think the availability Michael its pretty broad based. I mean it’s really when you think about the sectors of the market where business was difficult, you know it’s parallel and it’s strong. So we feel that there are opportunities in all businesses.

[Michael Binetti:]

Okay. And then If I could just sneak in one final one. There is obviously we get a lot of questions about new entrants coming into off price and everyone seems focused on getting their fair share of the growth that you talked about and the optimism you have in the category longer term. And the markets where you have seen you know a rising count of competitors fall somehow under the off price umbrella. Would you mind talking about sales dynamics, the competitive dynamics that you have seen in those markets? Thank you.

[Michael O'Sullivan:]

So Michael, its Michael O'Sullivan. We really haven’t seen any impact at this point. I mean if you think about the size of some of those new off price entrants, that’s not too surprising, that is too small to have made much of an impact. But I guess I say more broadly, we try not to get too distracted by what other companies are doing and what new entrance is coming into the market. We operate in a very competitive marketplace and we try and focus on what we’re good at and to make best use of the advantage and the strength that we have. And yes, as we look at the fourth quarter, the 4% comp on top of 6% comp last year suggest that we’re doing pretty well in that regard.

[Michael Binetti:]

Thanks a lot.

[Operator:]

Your next question comes from the line of Omar Saad from Evercore ISI. Your line is open.

[Omar Saad:]

Thank you. Good afternoon. Great quarter. I was wondering if you could – you mentioned the promotional environment a few times in your prepared remarks. I was wondering if you could elaborate on a little bit, are you seeing any impact on your customers or the marketplace given the broader, more promotional environment in the quarter? Obviously, a really good comp, merchandize margins up. But how do you see that impacting the business or what do you concern about how that might effect, how consumers behave, your customers behave in 2016? Thanks.

[Barbara Rentler:]

Well I think the increased promotional environment. I think what we saw in the fourth quarter especially in the department store sectors where we’re going to see as we continue through 2016 I think what it means for the customer, it means for us, I mean, obviously we’re not economist so we can’t determine what the customers thinking. But I think what it means to us in our business is that we need to continue to deliver great value. And so value is something that moves based off of what goes on in the department stores and specialty stores. So we have to make sure we do two things that we stay very liquid, so that we’re there and can maximize and closeout opportunities and those closeout opportunities then has to be at the right value. And since that moves that gives us the flexibility to deliver the values of the customers is wanting.

[Omar Saad:]

Okay. Thank you. But to be fair, it seems like and tell me if I’m reading this wrong. It seems like thus far your business is held up really well and you haven’t seen kind of any negative detrimental impact from just how promotional it was in holiday quarter?

[Barbara Rentler:]

That’s because we went into the quarter with two things. We went into the quarter with very strong packaway values and we also we exceeding our sales expectations, so we also chased a big part of that through closeouts and the key to delivering value to the customers understanding what goes on around you, so you really need to have liquidity to make sure that you keep that relationship, so that the customer satisfied.

[Omar Saad:]

Got it. That’s very helpful. Thank you.

[Operator:]

Your next question comes from the line of Richard Jaffe from Stifel. Your line is open.

[Richard Jaffe:]

Thanks very much and I appreciate all the color on the packaway and that seems to be the gift that’s going to keep on giving as we go into 2016. Looking at the product in the warehouse do you see more quarters or quarters that will be more impacted by packaway or less let’s say, maybe you have gloves that will come out in November or swimsuits that will come in August. Any direction or is it evenly balanced on our quarterly basis or seasonal basis I should say?

[Michael Hartshorn:]

Richard I would say, it’s fairly evenly balanced, nothing to call out on a quarter-by-quarter basis.

[Richard Jaffe:]

That’s helpful. And despite the environment and the competitive pressure we talked about earlier. Looking at 2016 your cautions remains and is that the same old issues that we talked about before as a competitive pressure, department stores discounting or are there new things that are fueling your caution despite the high level of success in tremendous headwind?

[Michael Hartshorn:]

Richard, I’d say it’s partly a mix of new and partly a mixture of whole things that’s sort of bubble up I think two main factors. First is that sort of the uncertainty in the macro economic and retail environment. I know you heard us say that before, but this year it seems to have gone off to especially what we’ve done in terms of the economy. So its about [Indiscernible] proposition. And then other is our own top multiyear comparisons. Again you heard us say that for but again if I just compare this coming quarter Q1 versus last year we’re up against the 5% comp, so again, we’ve to be caution there in our guidance.

[Richard Jaffe:]

Don't begrudge you the caution. Just wondering if there are other factors. Appreciate the input. Thank you.

[Operator:]

Your next question comes from the line of Bob Drbul from Nomura. Your line is open.

[Bob Drbul:]

Hi, good afternoon. I just have a couple of questions. I think on the geographical performance can you comment little bit on the West Coast business tied in the Texas and in the Southwest? And I just wondered if you could maybe comment on how some of the outerwear business it did throughout the quarter for you?

[Michael Hartshorn:]

On geographic performance, Bob, as we mentioned, the Midwest continues to be our strongest region that’s been true over the last eight quarters. California, our largest region also performed ahead of the same average. I think you also asked about Texas. Texas was relatively aligned with the chain on top of very strong comps last year, when it was one of our top performing regions.

[Barbara Rentler:]

And as it pertains to outerwear, the comp below company average, you would expect based off the weather and not the similar types of retailers.

[Bob Drbul:]

Great. And can you comment on how you plan freights for 2016 as costs going forward?

[Michael Hartshorn:]

We do see in freight some cost increase as carrier rate increases but it’s just up slightly over 2015 and so we have a plan.

[Bob Drbul:]

Thank you.

[Operator:]

Your next question comes from the line of Matthew Boss from JPMorgan. Your line is open.

[Matthew Boss:]

Thanks. So new store productivity in the quarter looks a little lighter than in the past where we’ve seen it. Can you just talk about performance in your latest store openings versus some of the more mature stores? Are there any timing shifts which maybe could have impacted this quarter? And then just as a remainder, what comps do you guys see from new stores in the first three years versus the chain and what’s the average payback period?

[Michael Hartshorn:]

Sure. On new store productivity, there is nothing to talk about in the quarter. There is always a mix of -- whether you are opening new market stores or existing market stores. We have said in the past that the overall new store productivity has come down over the last couple years with our entry into the Midwest and also our dd's expansion. That said, you can see the Midwest continues to be our strongest comping market, as we continue to gain name recognition there. What we usually see on the comp curve is over the first five years, we comp faster than the chain and we settle into about the chain average in year five. Overall, we put about a $5 million of capital on working capital into a store and the payback’s about two years.

[Matthew Boss:]

And then just one quick follow-up on that. When we do anticipate entering the Northeast?

[Michael Hartshorn:]

Not further while. We entered the Midwest about four years ago now and the Midwest is a fairly big region. So, we feel like we’ve got plenty of opportunity to build out that region. That’s probably going to keep us going certainly for the next several years, so it’s going to be sometime before we enter the Northeast.

[Matthew Boss:]

Great. Best of luck.

[Operator:]

Your next question comes from the line of Oliver Chen from Cowen and Company. Your line is open.

[Oliver Chen:]

Hi. Congrats on a really great quarter and end of the year. Regarding the year ahead as you are making these investments in labor, what are the major corporate strategies you are thinking about in terms of in-store execution opportunities with shrink or how you may think about the ratio of tops to bottoms or other opportunities like macro-merchandising? And then I just had a question for modeling. On the basket, can we assume that merch margin, like AUR; was AUR up as merch margins were up? I’m just curious about the dynamic there?

[Michael Hartshorn:]

So, I will start with the components of comp, Oliver. As we mentioned in our prepared remarks, the 4% comp was driven by a combination of higher transactions, which for us, that’s our proxy for traffic and an increase in the size of the average basket. The higher basket was driven both by higher units per transaction and AUR was up a bit as well. So all the components were up over last year and that’s pretty consistent with the trend we’ve seen throughout the year in 2015.

[Barbara Rentler:]

And Oliver, as it pertains to top to bottom, we wouldn’t talk about that in this form.

[Oliver Chen:]

Okay. And what about labor and how you are staffing stores and any efficiencies that you can drive just as we think about incremental year-over-year opportunities because your execution has just been stellar? So if you are able to share with us any corporate strategies there, it would help us just eliminate how we think about your numbers next year?

[Michael Hartshorn:]

So, Oliver, as Michael Hartshorn mentioned in the prepared remarks, we are going to be making further way for adjustments this year, including taking up a minimum hourly rate to $10 for eligible associates in the second quarter and those costs to be clear are build into our guidance. Now, as we put together, we have a very detailed and rigorous budgeting process as you might expect. And as we went through the budget for this year, we looked at lots of different areas that we could go after to try and capture efficiencies and offset some of those increased expenses, increased wage expenses. There wasn’t one big silver bullet. There were lots and lots of small savings initiatives that will add up to a lot. And it’s all the things you would expect. Some of them are reengineering processes in the stores to best utilize labor hours. There is also things like looking for savings in terms of services and supply that we purchase from the outside, looking for higher productivity in our DCs, looking for opportunities to trim non-merchant G&A. So there is a whole bunch of, I would say relatively small savings opportunities that add up to a lot and have allowed us to cover the wage rate increases that Michael Hartshorn mentioned earlier.

[Oliver Chen:]

Okay. And just finally on the merch margins. It’s great that you are making progress there. What’s the rationale for you being able to have that attractive view of merch margins going forward in the context of some of your conservatism about how the marketplace looks?

[Michael Hartshorn:]

Well, let me start by talking about fourth quarter. So fourth quarter, we obviously outperformed the high end of our comp sales targets. So that meant, we had faster inventory turns resulting in lower markdowns. We also benefitted from our ability to take advantage of buying opportunities in the marketplace, so both of those factors really contributed to better than planned merchandise margin. What we said in our guidance is that we expect merchandise margin up slightly over the year. We did operate with lower inventories throughout 2015 and ended it down 2% on an average store basis and we’d expect to operate a bit lower in 2016 as well and that should drive some margin improvement.

[Oliver Chen:]

Thank you. Best regards.

[Operator:]

[Operator Instructions] Your next question comes from the line of Brian Tunick from Royal Bank of Canada. Your line is open.

[Brian Tunick:]

Thanks. I will add my congrats as well. Curios, if you look at the merchandise mix of the business this past year and then you think three years from now, what do you think would be the biggest changes, would it be home growing faster than the rest of the business, would it be gifts and beauty, just curious if there is any categories you see moving over the next couple of years from where they are today? And then the second question, really our new customer acquisition or your marking initiatives. Anything you could share with us, if you’ve done any work or studies over the last 12, 18 months about sort of where your customers are coming from or what they are saying about Ross right now? Thanks very much.

[Barbara Rentler:]

Brian, in terms of the merchandise mix, we basically see growth in all our areas. If I had to select one area, I would say probably home would be that area. We’ve seen a lot of initiatives going on in there and gifts was a big portion of our fourth quarter success in home this year. So, if I had to pick one, it would be home.

[Michael Hartshorn:]

And then Brian, on your second piece about the customers and the new customers specifically. Add new customers, frankly looks a lot like our existing customers. As we do research on the demographics of customers and what they are looking for, the new customers demographically look very similar. What all our customers have in common, no matter what the demographics is they are all looking for great values and great bargains. So in terms of making sure that we can attract more customers and retain customers, your main focus is having the best assortments we can, the best values we can offer.

[Operator:]

Your next question comes from the line of David Glick with Buckingham Research. Your line is open.

[David Glick:]

Thank you. Add my congratulations. I wanted to go back to some of the differences that you were talking about 2016 and 2015. One important difference seems like -- the department store missed their plans by a much more significant margin in the fourth quarter, assuming there will be a lot more packaway opportunity as a result and then also a point back more aggressively on their receipts that they plan for 2016. So it does feel like they are being a little more conservative with our sales and receipt plans, particularly in the second half of this year. And I’m just wondering, how does that scenario play out for you guys and what are the pluses and minuses, given kind of what you see, if I characterized it correctly what you see today? Thanks.

[Barbara Rentler:]

From the supply side, department stores have pulled back over the last couple of years in total and how they plan. But it’s not about how you plan it. It’s really about the sales that materialize in a rate at which you spend your receipt money. So, if you look at where the department stores ended in January, most of them ended with more inventory and clearly ended with more clearance. And so as we enter into the spring season, one would expect that there would be a bubble of inventory that we would see in spring, which we could use to fuel in spring and back to your point on packaway that would help us drive through packaway. So it’s relative to have department stores plan, as well as relative to have the vendor’s plan with department stores and how much risks they are willing to take. So, we do feel there are trends. There will be opportunities in the marketplace. As long as traditional retailers continue to perform the way they are performing, you would think that there would be more opportunities there. So from that perspective on the supply side, we feel good, which is why we are keeping ourselves liquid and feel we are well positioned to take advantage of the opportunities in the marketplace.

[David Glick:]

And if department stores, inventories are more in line in the back half and there are always promotional, obviously. But if there are not in, as much of a liquidation type scenario as they were in the fourth quarter of 2015, how does that impact your businesses? Is that an opportunity on the merchandise margin front? I’m just trying to think through what, if that’s potential opportunity as well?

[Barbara Rentler:]

So just on the back to the supply lines, sales are the key contributor to what happens of excess inventory. So, sales are not stable in the world. If you look at sales, they have been volatile and you are watching department stores drop down. So again, receipts versus sales are two different scenarios. That’s what creates that bubble. In terms of margin, obviously chasing closeouts and keeping tight inventory control helps us to get better position and to improve on merchandised margins.

[Michael Hartshorn:]

And the other thing I would say David is when it less promotional, clearly we have more price differentiation. We can offer better value that tends to be better for us. But as you look at this year, certainly the way this year has started, there are lot of sort of economic uncertainty out there who’s to say whether or not the department stores are going to hit their sales plans later this year or not. Anything could happen, which is why it makes sense for us to be relatively cautious as we plan our business for the year.

[David Glick:]

Okay. Great. Thank you very much. Appreciate the color. Good luck.

[Operator:]

Your next question comes from the line of Marni Shapiro from The Retail Tracker. Your line is open.

[Marni Shapiro:]

Hi everyone. Congratulations on the quarter and on the year. I remember many, many years ago when off-prices to be the least respected space and now it’s like the most coveted space out there is kind of nice. I guess I have two questions on dd’s. So first is, I wasn’t’ sure, did you do packaway at dd’s and will you break out the percent, if you do? And you have a new presence in place in dd’s and the business is doing well. I guess you are opening about the same amount of stores each year. I guess what do you need to see it to take it to the next level of store openings at dd’s?

[Michael Hartshorn:]

So, thank you for your respect, Marni.

[Marni Shapiro:]

You’ve always had my respect.

[Michael Hartshorn:]

So on dd’s, couple of quick answers to early part of your question. Yes, dd’s does indeed use packaway and we don’t break it out just because dd’s is a relatively small part of cooperation. So, we don’t break out, disclose that information. On the second part of your question that what we would need to see. Actually, we are kind of already seeing it. We are pretty happy with dd’s performance over the last several years. We’ve kind have been in a patent here with dd’s, better than expected gains and sales and profits over a few years now. We opened just over 20 new dd’s stores a year, which on a base of 117 stores is quite a big growth rate. So, I don’t think you should expect that we are going to ramp that up significantly. Maybe in given year, it could go up to 25 but it’s not going to increase dramatically. Our history, as you know because you have been following us for a long time is that we are relatively conservative as we grow our business, as we’ve grown Ross and we will apply the same thinking as we grow dd’s. So the opening stores of 25 new stores, yes probably is the right planning assumption.

[Marni Shapiro:]

That seems fair. And I guess along the same lines as growing the organization along with the stores, Ross always had many more buyers than your largest competitor for many years, an impressive merchandising staff considering the size of the store base. How should I think about that at dd’s? Has the merchandising staff and buying staff, is it much bigger relative to the size of the dd’s, are you fully staffed there or is there still going to be a growing part of the business?

[Michael Hartshorn:]

It’s very much the same model, as you just described for Ross. We believe that fundamentally an enterprise of having the strongest buying team is a key competitive advantage and that applies to Ross and to dd’s. So, dd’s, we have invested in dd’s buying team over the last several years and we’ve build a very strong asset there. Actually, I didn’t really answer. You asked the question earlier about Brian Morrow joining. I think enhancing and expensing the merchant leadership has also been part of the investment that we made.

[Marni Shapiro:]

That’s fantastic. Best of luck, guys.

[Operator:]

Your next question comes from the line of Mike Baker from Deutsche Bank. Your line is open.

[Mike Baker:]

Hey. Thanks guys. So, I just wanted to follow-up real quickly on the wages issue, the move from $9 to $10. Could you quantify what kind of impact that will have on your total cost structure this year and how that might compare with any increase that you took in 2015?

[Michael Hartshorn:]

We didn’t quantify the impact because what we said is we have been able to substantially mitigate those costs, Michael O'Sullivan referred to before that was there were numerous cost efficiency projects then frankly no silver bullets to say which came from many different projects across many areas of the business, non-payroll and payroll related activities. So given that we’ve offset them in the guidance and offset them in 2015, we haven’t quantified the impact.

[Mike Baker:]

So with all of the offsets a similar impact in 2015 versus ’16? In other words, impacts that you can manage to offset.

[Michael Hartshorn:]

Yes. And I would say, remember, we went to $9 last year and $10 this year, so the impact is actually larger in ’16 than it was in ’15.

[Mike Baker:]

But still you are able to offset it.

[Michael Hartshorn:]

That’s right. Within the guidance, yeah.

[Mike Baker:]

Okay. Second, just another quick one. The earnings growth -- how does it pace throughout the year? So, we see the full year. We see the first quarter. So some quarter throughout the year are going to have to be better than the first quarter and with the wage increase coming in the second half of the year, I would think that that would impact that. Then again the packaway saying is reversing, so I guess which quarter should be bigger than others in terms of earnings growth?

[Michael Hartshorn:]

So, we only give one quarter at a time. It’s really going to be driven by sales. I mean that’s the impact, the biggest impact on earnings. But we wouldn’t quantify the quarters until we get to the conference call previous to the quarter.

[Mike Baker:]

Understood. Yeah, you are guiding to the same comp growth throughout the year, which is why I wanted to understand why the earnings growth would be different. But okay, I guess we can figure that out in our own model. Thanks a lot for the time.

[Michael Hartshorn:]

Sure. Thanks.

[Operator:]

Your next question comes from the line of David Mann from Johnson Rice. Your line is open.

[David Mann:]

Yes. Thank you. Nice year, guys. Question or couple questions on the balance sheet. The inventory growth in the fourth quarter was only like up 3%, which was the slowest growth all year, which seems a little counterintuitive, given the abundant availability of merchandise that we all are hearing about. So, I’m just curious if you can reconcile that. The reason you weren’t more aggressive with -- to gain advantage of availability or we see availability maybe not as strong as we are all thinking.

[Barbara Rentler:]

David, there is availability in the market. But as you are talking about buying packaway, there is few things involved with buying packaway. There is price. There is value. There is this -- the timing of delivery. So when we went in there and assessed what we bought, we ended at 47% versus 45%, so we were comfortable with that number and we will continue to goods as we come across using that same criteria, understanding where we believe value will go in the future.

[David Mann:]

Okay. And then one other balance sheet item. The accounts payable leverage has been trending down all year, even though you are obviously turning the merchandise pretty fast. Michael, anything you can share on that about why that’s going down and where we would think that would go perhaps in 2o16?

[Michael Hartshorn:]

Yes. I think in 2016 it would be similar levels to this year. At year end there was a timing difference, if you recall last year we had the port disruption and as part of mitigation efforts we brought in inventory early that had brought up leverage last year, so we’re up against that compare. But really it’s a function of timing of receipts including packaway receipts

[David Mann:]

Okay. Great. Thank you.

[Operator:]

Your next question comes from the line of Kimberly Greenberger from Morgan Stanley. Your line is open.

[Kimberly Greenberger:]

Great. Thank you. I will add my congratulations on a really great fourth quarter and a fabulous year. Barbara I just wanted to follow-up on David’s question regarding the 3% growth in inventory in the fourth quarter. Would the right conclusion be based on the comments that you just made that your view of where the value or where’s a maybe the market price of goods is going in the short term might be down and so you were basically holding back committing to packaway goods given your cautious outlook. And then, as a result of that, your view would then be you might be able to in fact buy even more goods in the February, March, even April timeframe relative to those you could acquire in November and December, is that the right read on the situation?

[Barbara Rentler:]

I think the way I would look at this situation is whenever we buy packaway whether with this past fourth quarter, those are the metrics we look at, price, value, timing of when we want to bring it in. so, we’re just going through the same process we normally go through. So when we went out and there were goods available, we went to see – if we saw it met the criteria of where we saw we were going. And in some places you’re assuming that the vendors had merchandize, they’re going to move on the price, right. So sometimes vendors move on the price based of their needs. It’s the end of the quarter, end of a half. So there is a lot of variables that we can’t control. The only think I can say is that we bought what we thought was appropriate. We ended with 47% versus 45%. We feel comfortable with that number. And ultimately we’re only going to buy what we think is the right price. Packaway is very hard to nail down. In a quarter in [Indiscernible] there has to be, there is some art to buying packaway. You’d have to feel comfortable that after you put that in there, when you go to bring that out whether its four months later or eight months later, six months later depending upon the product that the value is right. So, there’s a lot of variables that we can determine as we’re out in the marketplace, but that’s really what the buyers do everyday of the week. So that was really our assessment in the fourth quarter of how felt about packaway. Now, whether vendors will move off the price as we get further into the next season maybe, maybe some people will hold inventory over, I can’t answer those questions for the vendors. I can only answer what we feel comfortable in doing, which is the same thing we’ve done every season.

[Kimberly Greenberger:]

Great. And just one follow-up to that, did the vendors in general seem to have a somewhat challenging 2015 including a tough Q4. Are you hearing from any of your vendors that they thought maybe there might be a change in strategy, opportunity in 2016 or its different way to approach their own inventory management. Do they reveal that information to you? And do you have any color on perhaps what maybe happening broadly among the vendor community that you might be able to share in this forum?

[Barbara Rentler:]

Not really Kimberly, I mean, vendors aren't going to be quick to be telling us that they’re going to have more or less inventory. So, its really each vendor does their own thing and so I can’t really determine that, to be honest with you.

[Kimberly Greenberger:]

Okay. Good luck here for 2016.

[Barbara Rentler:]

Thank you. Operator Your next question comes from the line of Daniel Hofkin from William Blair & Company. Your line is open.

[Daniel Hofkin:]

Good afternoon. Great results once again. Just a couple of quick questions. So, thinking about beyond and I know you haven’t given guidance for next year yet. Is it fair to say that you would likely expect further wage increases beyond this year similar to what your largest competitor has discussed? And I guess related to that what enables you beyond this year to kind of get to the low double-digit sort of normalized EPS growth given that this year’s wage increases that you’re offsetting them in a number of ways on SG&A? And then I have one follow-up.

[Michael Hartshorn:]

So, Daniel as you say next year, no, we haven’t release guidance for 2017 yet. But as you know, I think we’ve said before that we would expect that over the next few years as the economy – or if the economy picks up, we may see more expense pressures not just us, but in general companies and retailers will face more expense pressures including high wage rates. Obviously as we start to plan 2017 which won’t be for sometime, but as we start plan 2017, we’ll start to look at what are the kinds of things that we could put in place to offset those kinds of expense pressure. Too early to comment on those now, but that’s the kind of process that we would go through.

[Daniel Hofkin:]

Okay. Is there’s any just big picture thing, in terms of like that allows you to get to a more normalized low double-digit EPS growth over time?

[Michael Hartshorn:]

Well, just to be clear, I mean, we ended the year with EPS up 14% despite the wage increase on a four comps, but certainly in between a three and four comp, we think we can get to double-digit EPS growth over the longer term.

[Daniel Hofkin:]

Okay.

[Michael O'Sullivan:]

Its worth underlying at that point. Our guidance if here is obviously 1% to 2% comp and that’s what driving the EPS guidance as Michael Hartshorn just said, at a more normalized comp, I think we’ve said in the past that our long-term model includes a 3% to 4% comp. At those levels we expect low double-digit EPS growth.

[Daniel Hofkin:]

That’s helpful. Thanks. And then, as it relates to AUR and the slightly different trend for you versus the main competitor. Any comment there in terms of what – I know its presumably not any inflation. There’s probably some mix there. But what’s driving the moderately higher AUR for you guys versus the other company?

[Michael Hartshorn:]

Yes. I mean for us it’s a bit of mix, but its also we continue to operate with lower inventory levels which means we’re taking less markdowns, returning faster and it has an impact on AUR you’re selling at higher prices. I’d say, so between those two mix and our lower markdowns is what’s driving the higher AUR.

[Daniel Hofkin:]

Very helpful. Thanks. Best of luck in the coming year. Operator Your next question comes from the line of Paul Lejuez from Citi. Your line is open.

[Paul Lejuez:]

Hey, thanks. Just wondering as far as CapEx once you look beyond this year, is there anything lumpy we need to thinking about over the next several years that might on your radar screen that you can share with us. And also just thinking about separately, where are your customers cross shopping, which retailers do you see the most overlap with, I’m curious if you look at when you see a big box department store, retailer close, what sort of a lift that you get in nearby stores if in fact you take a look at that? Thanks.

[Michael Hartshorn:]

Paul, on capita, at least over the next couple of years they will look similar to what we said for 2016 and call it 425 to 450 range I would say, so nothing extraordinary currently in our longer – at least over the next couple of years.

[Michael O'Sullivan:]

And Paul on the other two pieces of your questions. Customers, we operate in a very – we operate in a pretty large and very competitively fragmented marketplace. So, when we ask our customers, if you hadn’t spend that $30 at Ross today, where would you have spent here. We get a long, long list of companies that they would have spent that money at. So, from cross shopping point of view we’re competing with everyone which is why we need to make sure we have the best possible values out there. In terms of your…

[Paul Lejuez:]

Do you think tops that list?

[Michael O'Sullivan:]

It depends on the particular store, the particular market that we’re looking at. Nationally I think you could probably just pick our closest peers and nationally, obviously they would show up on that list. But the point I’m trying to make is none of them account for a very large share of that list, that the list itself is very fragmented and spread between many, many competitors which is why we need to make sure that we’re sharp versus all those competitors. The last part of your question though big box department stores going out of business and how that affects any other individual stores? It’s really hard to say because the truth is that there are lots of things that go into the business that an individual store does including traffic levels to that strip mall, the competitive intensity in that strip mall, sometime they actually having more of price competitors in that strip mall can actually be helpful. So its hard to say whether or not a large retailer nearby going out of business helps us or hurts us, it depends who replaces in that space, what happen to the traffic in that strip mall et cetera.

[Paul Lejuez:]

Just one more, any changes in the store size for your openings next year as you manage inventory down. Just wondering if you’re continuing to bring the size of the store down?

[Michael O'Sullivan:]

Sure. So the time that we brought down our average inventory per store by about 40% over the last several years, it has presented us with a few opportunities to make the stores easier to shop, so we certainly being doing that, expand into fast growing or new categories, and again we’ve been doing that. And then, as you referencing also to reduce the store size, obviously that sizeable for new stores rather than existing stores. We’ve also been doing that some degree as well. So, I would say that the lower inventory levels has given us the opportunity to do a number of things with regard to the size of the store and how we use the space in the store.

[Paul Lejuez:]

Thank you, guys. Good luck.

[Operator:]

Your next question comes from the line of Roxanne Meyer from MKM Partners. Your line is open.

[Roxanne Meyer:]

Great. Thanks. Let me add my congratulations on a terrific 4Q and full year. My question is follow-up on the home category. I know that Barbara mentioned that over the next few years she would think about home maybe presenting the best opportunity. And I’m just wondering how it performed in 4Q and what opportunities you see in 2016?

[Barbara Rentler:]

Well, home perform better than company and it was really driven by gift-giving in Q4 and the thing about the home category is so broad based. There is so many product classifications in there. When you think about it versus apparel, there is just more things to go into which is why I feel that home is a good category for us to grow.

[Roxanne Meyer:]

Okay, great. And then just really quickly, what comp do you need in 2016 to leverage our fixed cost?

[Michael Hartshorn:]

So what we said in the past, Roxanne, it hasn’t change for 2016 that a three comp we should be able lever SG&A and four comp for occupancy cost.

[Roxanne Meyer:]

Okay, great. Thanks. And best of luck in the first quarter.

[Michael Hartshorn:]

Thank you.

[Operator:]

Your next question comes from the line of Lorraine Hutchinson from Merrill Lynch. Your line is open.

[Lorraine Hutchinson:]

Thank you. Good afternoon. Just wanted to clarify comment that you made earlier on the call about the rough start to the year, and just confirm that you’re talking about the over the macro and not Ross specifically?

[Michael Hartshorn:]

Yes. To be clear, I was just referring to the fact that the overall economy I think to be a number of sort of concerns and questions out there about the overall economy and we don’t know to what degree that will impact retail and our business over the coming 12 months.

[Lorraine Hutchinson:]

Great. And then as wages continue to rise, are there any investments to make in your distribution centers to maybe make them a little bit more efficient?

[Michael Hartshorn:]

Yes. That’s actually one of things as we put together the budget for this year, as you would expect one of things that we looked at were any efficiencies, any areas of the DC, any processes in the DC that would reengineer or automate and certainly that’s one of the areas that we’ve pursued in terms of coming up with offsetting savings. I would say, it just one of the areas. There are other areas in the company as well, such as stores, processes in stores, G&A, supply cost, et cetera, that we also look aggressively at.

[Lorraine Hutchinson:]

Thank you.

[Operator:]

Your next question comes from the line of Stephen Grambling from Goldman Sachs. Your line is open.

[Stephen Grambling:]

Hey, good afternoon. Just wanted to make sure I’m clear on the gross margin packaway topic. This was one of the biggest swings, that’s relates the impact on both of these in years, so can you just clarify some of the drivers of these factors given the absolute percentage of packaway didn’t seem to move much?

[Michael Hartshorn:]

So the absolute dollars of packaway did drop there in the quarter, Stephen, so as we talked about in the past we capital the cost to store and process packaway including fixed cost and for us we charged gross margin or charge cost of goods sold when it sells. So for us the absolute dollar value of packaway fell during the quarter which means we had to take a charge and that was greater than the previous years. Of the 100 basis points of distribution center deleverage in the quarter all of that was related to the packaway time.

[Stephen Grambling:]

That’s helpful. And then an unrelated question, some of your peers have had some pretty good success with royalty programs, can you just remind us of your own thinking there>

[Michael Hartshorn:]

Sure. We don’t have any plans right now to launch a royalty program. We're always willing to look at new ideas. But frankly over time we found most effective way to build customer royalty with the off price customer is to consistently offer great deals, great bargains. So more than anything else, that’s how we build royalty.

[Stephen Grambling:]

Fair enough. Best of luck this year. Thanks.

[Operator:]

Your next question comes from the line of Jeff Stein from Northcoast Research. Your line is open.

[Jeff Stein:]

Good afternoon, Barbara. Quick question on the junior category, that’s historically been one of the stronger performing businesses for you, and no mention of it on the call, just wondering how it perform?

[Barbara Rentler:]

Juniors performed in line with the chain average and it was up against very strong comparison from the prior year. So we’ve pleased with the junior business.

[Jeff Stein:]

Okay. And with regard to packaway, I’m just kind of curious, do you still have goods in inventory from the port slowdown last year? Because I would imagine that would be some pretty high margin stuff that you could put out, now if you still have some?

[Barbara Rentler:]

As it pertains to the mix, you're talking about the actual mix we own in our assortment. Its hard to tell. I’m sorry go ahead.

[Jeff Stein:]

No, I was going to say because -- yes, it depends on mix that you have in your packaway, so I’m wondering what percent of your packaway for example might be goods that you brought during this spring and perhaps early summer last year, as result the port slowdown and how much of that might flow through your P&L during the first quarter?

[Michael Hartshorn:]

I would say Jeff most of the core issues were really in the first quarter of last year. And given that timing, I think that would be very little that we bought that long ago that will still be in packaway.

[Jeff Stein:]

Got it.

[Michael Hartshorn:]

That said, the port slowdowns could have had some knock-on effects in terms of inventory that became available in subsequent quarters. Hard for us to identify and quantify that, but certainly anything that we bought in more recent quarters could well still be in our packaway balance.

[Barbara Rentler:]

It was hard to tell us at a certain point what was coming from just business being off in the department store sector, the supply that came from there and the supply that came from the port after a while it just became one large supply.

[Jeff Stein:]

One lump. Okay. Thanks a lot.

[Operator:]

There are no further questions at this time. I’m turning the call back over to Barbara Rentler.

[Barbara Rentler:]

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

[Operator:]

This concludes the conference call. You may now disconnect.