Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Ross Stores, Inc., (NASDAQ:ROST)

Q1 2006 Earnings Conference Call

May 17, 2006, 11:00 a.m. EST

Executives:

Michael Balmuth, Vice Chairman, President and CEO

Norman A. Ferber, Chairman of the Board, Ross Stores, Inc.

Gary L. Cribb, Executive Vice President and Chief Operations Officer

Michael B. O’Sullivan, Executive Vice President & Chief Administrative Officer

John G. Call, Senior Vice President and Chief Financial Officer

Katie Loughnot, Vice President of Investor Relations

Analysts:

Brian Tunick, JP Morgan

Ken Guyer, Piper Jaffray

Jeff Black, Lehman Brothers

Kimberly Greenberger, Citigroup

Paul Lejuez, Credit Suisse-North America

Dana Telsey, Telsey Advisory

Margaret Mager, Goldman Sachs & Co.

Patrick McKeever, Avondale Partners

Kim Dao, Pioneer Investments

David Mann, Johnson Rice & Company

Michael Whitfield, Hahn Capital

Operator

Good morning. Welcome to the Ross Stores’ First Quarter 2006 Earnings Release Conference Call. The call will begin with prepared comments by Michael Balmuth, Vice Chairman, President, and Chief Executive Officer, followed by a question and answer session. After the speaker’s remarks there will be a question and answer period. If you would like to ask a question during this time, please press “*” then the number “1” on your telephone keypad. If you would like to withdraw your question, please press the “#” key. At this time, I would like to turn the call over to Michael Balmuth, Vice Chairman, President, and Chief Executive Officer.

Michael Balmuth, Vice Chairman, President, and Chief Executive Officer

Good morning. Joining me on our call today are Norman Ferber, Chairman of the Board; Gary Cribb, Executive Vice President and Chief Operations Officer; Michael O’Sullivan, Executive Vice President and Chief Administrative Officer; John Call, Senior Vice President and Chief Financial Officer; and Katie Loughnot, Vice President of Investor Relations. We’ll begin our call today with a brief review of our first quarter performance followed by our outlook and guidance for second quarter of 2006. We will also discuss our longer range plans and objectives. Afterwards, we’ll be happy to respond to any questions you may have.

Before we begin, I want to note that our comments on this call will contain forward-looking statements regarding expectations about future growth and financial results and other matters that are based on management’s current forecast of aspects of the company’s future business. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from historical results or current expectations. These risk factors are detailed in today’s press release and our fiscal 2005 Form 10-K on file with the SEC.

Today, we reported 2006 first quarter earnings per share of $0.41, up 21% over $0.34 earned in the first quarter of 2005. Net earnings for the first Quarter of 2006 were $59.2 million compared to $50.1 million in the prior year. Our first quarter 2006 results are after $3.5 million or an equivalent of about $1.5 per share in stock option related expenses in connection with the adoption of FAS 123R share-based payments.

Sales for the first quarter increased 15% to $1.292 billion with comparable store sales up 6% over the prior year. Strength across many geographic markets and merchandise categories drove out healthy sales gain during the first quarter. The strongest regions are during the period were the Southwest and Texas, both of which posted double digit gains in same-store sales. The best performing merchandise categories continued to be shoes, juniors, and home, which generated solid double-digit gains and comparable store sales as well.

We also realized better than expected sales gains at dd’s DISCOUNTS. First quarter consolidated operating margin before the effect of about 25 basis points in stock option related expenses expanded by about 40 basis points to 7.7%. Our improved profitability was driven mainly by a decline in distribution costs as a percent of sales and leverage on other expenses, partially offset by higher shrinkage accruals and increases in both freights and intensive compensation costs as a percent of revenue.

As noted in today’s press release, we adopted FAS 123R new accounting rules related to stock option expensing effective with our first quarter 2006 results. The portion of these new non-cash compensation charges that relates to our associates in the merchandizing and distribution organizations is included in cost of goods sold. The balance of these non-cash charges is included in selling general and administrative expenses.

The company’s operating results for the first quarter of fiscal 2006 also reflects comparable classification of the company’s cash bonus payments and restricted stock compensation cost. In prior periods, all of these expenses were included in selling general and administrative expenses. For consistent presentation with the first quarter of 2006, we are reclassifying a portion of the bonus and restricted stock expenses for prior periods including the first quarter of 2005. The reclassification for prior periods has no impact on previously reported total cost and expenses, net earnings or earnings per share. We are making corresponding adjustments to reflect these line item classifications to our previously reported quarterly operating statements for 2004 and 2005, and they are now available on the press release page of our website located at www.rossstores.com.

As we ended the first quarter, total consolidated inventories were up about 2% driven mainly by the growth in new stores, partially offset by the lower in-store level. Pack away was about 36% of total inventories at the end of April compared to 34% at the same time last year. Average in-store inventories at quarter end was down about 8% on top of a 9% increase in the prior year, when we boosted inventory levels in preparation for our data center move. Our in-store inventory number includes inventory once it is allocated at the distribution centers until it sells through.

With the recent improvement in distribution center productivity, we have realized a larger than expected reduction in intransit time to stores, which we believe led to higher than planned in-store inventory levels. This situation combined with the later Easter holidays led to more aggressive markdowns of first quarter receipts in April.

Moving forward, we believe that these supply chain efficiencies are sustainable and that we can operate our business on slightly lower levels of in-store inventory. As a result, over the balance of the year we are planning in-store inventory levels to be down about 4% to 6%versus comparable levels in 2005. We believe the trend of lower inventory levels in our business will contribute to a faster and fresher flow of volumes throughout our stores.

Earlier this month, we reiterated our guidance for same-store sales to increase 3% to 4% in the second quarter of 2006 and for earnings per share to be in the range of $0.30 to $0.32 after projective stock option related expenses equivalent to about $0.01 to $0.02 per share. The financial assumptions that support these projections are as follows: Sales are expected to grow about 10% to 11% for the second quarter of 2006 compared to the prior year period. We are forecasting a net addition of about 25 new stores during the second quarter including 19 Ross locations and 6 dd’s stores. Same-store sales are forecasted to increase 3% to 4% for the quarter. In the month of May we are slightly ahead of our forecast for a 3% to 4% gain in comparable store sales. For the balance of the quarter, we are forecasting same-store sales to be up 3% to 4% June followed by a 4% to 5% increase in July.

Including the impact without 25-basis points in stock option related expenses, operating margin is expected to be flat to down 40 basis points compared to 5.9% in the second quarter of 2005. Modest improvement in merchandize gross margin and distribution and buying costs are forecast to be offset by a higher shrink accrual and increases in freight, occupancy, and store expense.

As a remainder we had expected continued pressure on operating margin and earnings during the first half of 2006 from the higher year-over-year shrink accrual and higher freight cost until the anniversary to charge for shortage that we took in the third quarter of 2005. We still plan to take our next full physical inventory in September 2006 and are hopeful that our shortlist control initiatives will allow us to show some improvement in our shrink results when we announce third quarter 2006 earnings. We are forecasting interest to neutral to earnings in the second quarter. Our tax rate is expected to remain unchanged at about 39%, and we estimate weighted average diluted shares outstanding of about 144 million. For the second half of 2006, we continue to plan same-store sales gains of 3% to 4% in the third quarter and 2% to 3% in the fourth quarter.

Third quarter 2006 earnings per share after stock option related expenses, equivalent to about $0.01 to $0.02 per share are projected to be in the range of about $0.27 to $0.29 compared to $0.25 in EPS for the third quarter of 2005. Expected operating margin improvement from the lower shortage and related accounts payable expense versus the prior year is projected to be partially offset mainly by higher freight, occupancy, and store expense.

For the fourth quarter, which has 14 weeks this year, earnings per share are projected to be in the range of $0.60 to $0.64 inclusive of stock option related expenses, equivalent to about $0.01 to $0.02 per share. This 14-week forecast compares to reported earnings per share of $0.49 for the 13-week fourth quarter of 2005. We estimate that the 53rd week in 2006 will add about $80 million in revenue and approximately $0.06 to $0.07 in earnings per share, which is included in our guidance. As a result, for the full 53-week 2006 year, we now project that earnings per share will increase 16% to 22% to a forecasted range of $1.58 to $1.66 inclusive of stock option related expenses, equivalent to about $0.06 per share related to the adoption of FAS 123R.

We are pleased to report that both our balance sheet and cash flows remain strong and healthy. We ended the period with $145 million in cash and no debt after repaying the $50 million term loan for the Southwest distribution center equipment. Subsequent to the end of the quarter, we also utilized available cash in early May to pay down our obligation of $87 million on the Southeast distribution center lease. We are currently exploring long-term financing alternatives for these capital investments.

We continue to return capital to stockholders through both our stock repurchase and dividend programs. During the first three months of 2006, we repurchased 1.7 million shares of common stock for an aggregate of $48.9 million under the two-year $400 million program authorized by our Board of Directors in the fourth quarter of 2005. We ended the first quarter with 143 million shares of common stock issued and outstanding.

Looking ahead, as always our major focus is on executing our off-price strategy of continuing to secure the best branded bargains to satisfy our customers’ expectations. In addition, over the next 18-24 months we will continue to work on developing new micro-merchandizing initiatives to address customer wants and needs at a more local level without compromising our ability to offer our customers a wide assortment of branded bargains. Our primary objective is to strengthen the performance in new regions like the Southeast as well as in below-average markets such as the Mid-Atlantic. This initiative should also be of benefit when we begin to grow again into new geographies in the future.

We are pleased with the progress we have made over the last few quarters as evidenced by our recent trend of solid gains and comparable store sales. In addition, as expected, we are beginning to see gradual improvement in operating profitability.

For the balance of 2006, we will remain very focused on delivering fresh and exciting main brand bargains every day while also continuing our new micro-merchandising effort, which we anticipate will allow us over time to get closer to our customers at a more local level. We also continue to work on improving distribution productivity and expense trends and on staying diligent in our efforts to get shortage results back to more normal levels.

These actions are projected to contribute to a gradual improvement over time in store sales productivity and operating profitability, enhancing our prospects for achieving our targets of 15% to 20% annual earnings per share growth over the next several years.

At this point, we’d like to open up the call and respond to any questions you may have.

Question-and-Answer Session

Operator

Thank you. At this time, I would like to remind everyone, if you would like to ask a question please press “*” then the number “1” on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Our first question is coming from Brian Tunick of JP Morgan.

Brian Tunick, JP Morgan

Hi, thanks. Michael, a few question for you. First one, since the comp store sales trends have been pretty strong, we are wondering how the new store productivity differs versus mature stores, how much of the de-leveraging of occupancy are we seeing? Where are the new stores preferred versus the mature stores? And the second question is does your second half guidance already assume the higher shrink reserves? Thanks very much.

John G. Call, Senior Vice President and Chief Financial Officer

So, Brian, the first question was new stores and productivity versus comp?

Brian Tunick, JP Morgan

Yeah, just trying to understand, since your same-store sales had been strong, but you have occupancy de-leveraging, we’re assuming it’s the new store productivity that has been dragging it down. Can you just talk about some of the gaps between maybe the new stores?

John G. Call, Senior Vice President and Chief Financial Officer

So, relative to occupancy there are a couple of things going on. First is that the average store volumes aren’t keeping pace with the comps due to the newer stores and newer regions coming in over the last couple of years.

Brian Tunick, JP Morgan

How significant is that gap?

John G. Call, Senior Vice President and Chief Financial Officer

We’ve said before that those new stores are kind of 70’ish and in that range, that’s what we reported before and that’s pretty consistent. But we also had a change in accounting that put some pressure on occupancy. While we now expand the pre-opening lease top based on new accounting guidance. We also this year are coming up against some lease renewals for some of the older stores that are putting some pressure on occupancy.

Brian Tunick, JP Morgan

Okay. And the second question, does the second half guidance you’re issuing include the higher shrink reserves?

John G. Call, Senior Vice President and Chief Financial Officer

Yes it does.

Brian Tunick, JP Morgan

Okay, thanks very much.

Operator

Thank you. Our next question is coming from Ken Guyer of Piper Jaffray.

Ken Guyer, Piper Jaffray

Hi, just a couple of questions for you. First of all, I believe last year in the second quarter Florida was a very strong region in terms of sales. I was wondering how this region will be impacted this year given the profitability issues you’ve previously addressed in those newer markets? And then regarding those issues, is it primarily a mix issue related to the region?

John G. Call, Senior Vice President and Chief Financial Officer

Actually, as you talk about the Southeast, Florida is not included in that. Florida historically has done very well and we believe it will continue to do well. So, it’s not improving the Southeast markets that we talked about.

Michael Balmuth, Vice Chairman, President and CEO

And relative to question regarding mix, we believe it’s an assortment issue that has many components to it and mix is certainly part of it.

Ken Guyer, Piper Jaffray

Okay. Then also, with recent consolidation at Federated-May, have you been impacted at all by the clearance activity related to the store closures, and then do you expect going forward there will be any increased availability of product for you?

Michael Balmuth, Vice Chairman, President and CEO

It’s hard to imagine that. We know exactly where the stores were that went out of business obviously, but we had a reasonable comp performance with the quarter. So, we think we were impacted in the first part of the sales, and it became less and less as they went on. Your second part of the question was?

Ken Guyer, Piper Jaffray

Just going forward, do you expect, is there is going to be anymore availability of product due to these closures?

Michael Balmuth, Vice Chairman, President and CEO

It’s hard to say but product availability has been pretty good and the dynamics in the industry are changing based on the consolidation. I do think the consolidation ultimately is a plus for off price for availability.

Ken Guyer, Piper Jaffray

All right. And then lastly, if you could give us any update on the initiatives you’ve used to correct the shrink issue.

Gary L. Cribb, Executive Vice President and Chief Operations Officer

Sure, there are number of in-store initiatives that we focused on. We focused on increased electronic surveillance. We’re tagging more than we’ve historically tagged in the past, and our worst stores were utilizing express security personnel in those stores to address both internal and external theft, and we’re hopeful that we’re going to see much improved results when we take our physical inventory in September.

Ken Guyer, Piper Jaffray

Great, thank you.

Operator

Thank you. Our next question is coming from Jeff Black of Lehman Brothers.

Jeff Black, Lehman Brothers

Hi, thanks and good morning. I have a couple of questions. First, can we get some color on how much of weight on the gross margins in the first quarter. And as we move into the second quarter, we were trying to determine why there would not be a little more upside in the gross margin; I mean we gave up a 130 basis points on the markdown side last year, how much of that do you think we get back? And if the answer is that you took some extra markdown in the back half of the quarter in the first quarter, we’re just trying to get a sense of comps accelerated over the quarter. It looks like inventories were taken down pretty far and that you managed inventory well. So, I just want to get a sense why there wouldn’t be a little more upside in the gross margins? Thanks.

John G. Call, Senior Vice President and Chief Financial Officer

Jeff, on trade for the first quarter, it was about 20 basis points, and we don’t see that trend changing throughout the year with the gas prices. The second quarter was regarding inventory levels at the end of first quarter?

Jeff Black, Lehman Brothers

Yeah, regarding inventory levels and why we wouldn’t see…you know you gave up a 130 basis points on the markdown side in the second quarter last year, how much of that do you think you really get back given that inventory levels are in a lot better shape as we see it heading into the second quarter this year?

John G. Call, Senior Vice President and Chief Financial Officer

So let me turn around a bit. We ended the first quarter, although they appeared low at down 8, we were actually against up 9 last year relative to our data center move. We actually believe our inventory levels at the end of the quarter were a little higher than where we would like them to be, which is going to put some pressure on markdown in the second quarter. So, with somewhat higher inventory levels, as we go forward, we’re going to take those at around 4% to 6%, you should be seeing that, which will allow us to look at trying to pressure merchandising the stores, which will go out to take the business. So, although inventories may appear lower, our view is that they are still a little bit too high.

Jeff Black, Lehman Brothers

Could give us any color on what categories or where we’ve seen these imbalances and why you’re getting them? I mean, you made some comments in the April sales release about the economy being or consumer…

Michael Balmuth, Vice Chairman, President and CEO

Our inventory levels were higher than we wanted in the first quarter. Essentially, we made errors in planning our inventory. It was too high and as we went back and looked at this, we really planned our business up against two years of distorted inventories because of the implementation of core merchandising where we had to upload our inventory at a portion of the first quarter in 2004 and our data center move in our 2005 we had to upload inventories yet again. So, we’re really in many ways planning inventories versus 2003, which is not a good thing for a retailer to be doing in 2006. So, we think that also contributed to what we would say our inventory planning mistake. But, we do believe we’ve now go it under control for the rest of the year and with our DC efficiencies, we think the fact that we can run lower inventories is a very good thing for an off-site company to be doing, and we’re very pleased that we are building efficiencies that puts us in a position to do that.

Jeff Black, Lehman Brothers

Okay fair enough, thanks a lot.

Operator

Thank you. Our next question is coming from Kimberly Greenberger of Citigroup.

Kimberly Greenberger, Citigroup

Thank you, good morning. I’m wondering if you could talk about the 195 basis points that we lost last year in the third quarter on shrinkage and the accounts table adjustments, and approximately what percentage of that cost are you assuming you get back in the third quarter based on your guidance, and does you guidance assume a favorable shrink result? And then secondarily, if you could just give us a bit more clarity on the different components and how much they were moving in basis points in the gross margins in line of the SG&A, that would be helpful. Thanks.

John G. Call, Senior Vice President and Chief Financial Officer

For your first part of your question, Kimberly, so the third quarter does not assume any improvement in shrink. The guidance assumes the same accrual rates that we’re using in the first half. Having said that, in the third quarter, we do get the bigger piece of that back. I think it’s important to remember also that last year…and without the inventory accounts table issues earnings would have been up 33% against a pretty tough quarter from that perspective. And the second part of your question?

Kimberly Greenberger, Citigroup

The second part was just if you could give us some granularity on the basis point movement of DC cost in terms of computation, just some additional detail on the gross margin in the SG&A line within the first quarter.

John G. Call, Senior Vice President and Chief Financial Officer

So, DC costs were actually favorable up by about 100 basis points offset by shrink and freight; shrink was about 40 and freight was about 20. So, pretty good DC performance, and again, we have headwind on shrink and freight. In terms of G&A option expense, it was about 15 basis points and incentive plans accruing to about 15 basis points as well.

Kimberly Greenberger, Citigroup

And the occupancy piece within the gross margin line?

John G. Call, Senior Vice President and Chief Financial Officer

So, the occupancy piece, because of the 6% cost we broke even, where in other costs we’re planning lower comp and we’re now trying to get that leveraged. If we do better in sales, obviously we will.

Kimberly Greenberger, Citigroup

And lastly on the 6% comp increase in the quarter, if you could just tell us how that breaks down from an average seller’s sale versus the number of transactions? That would be great, thanks.

John G. Call, Senior Vice President and Chief Financial Officer

Sure. So the 6% comp is driven half by number of the transactions and the other half by the size of the basket. Actually, the average resale is about flat and we are getting slightly more units in the basket than last year.

Kimberly Greenberger, Citigroup

Thank you.

Operator

Thank you. Our next question is coming from Paul Lejuez of Credit Suisse.

Paul Lejuez, Credit Suisse-North America

Hey guys, Paul Lejuez. Just last month you made a couple of cautionary comments, I’m just wondering what is it that you’re seeing perhaps out in the field, what are your buyers telling you that makes you a bit more cautious. Gasoline, is that weighing on any particular region of the country? I’m just trying to dig in a little bit more on those cautionary comments.

Michael Balmuth, Vice Chairman, President and CEO

These cautionary comments were really not based on anything our buyers were seeing. Buyers would usually tend to be optimistic, so it has nothing to do with the merchandise that’s available, which is very plentiful. It has to do with that in prior years when there have been gas hikes of a significant nature, we’ve seen a slow down of consumer spending, and that was simply really what our caution was, and still is.

Paul Lejuez, Credit Suisse-North America

Any particular regions that you’re already seeing that, because it didn’t seem that you really ran into that last year when gas was hiked?

Michael Balmuth, Vice Chairman, President and CEO

Yeah, when we looked at it we’ve looked it over longer horizons and one period. And it’s hard to tell even last year if we might have been impacted, we might have done even better. But in other the years we’ve certainly had definitive correlations. Right now, we don’t see it in a particular region, but as you move into the year and get into the winter months, it becomes harder and harder.

Paul Lejuez, Credit Suisse-North America

Okay, thanks, good luck.

Operator

Thank you. Our next question is coming from Dana Telsey of TAC.

Dana Telsey, Telsey Advisory

Hi good morning everyone. Can you talk a little bit about some of those go-forward systems initiatives that you had in terms of more micro-merchandising and some of the next evolutions? When do you think some of this starts to get hold, what’s the cost and what do you see the benefit being? Thank you.

Michael B. O’Sullivan, Executive Vice President, CAO

This is Michael O’Sullivan, I’ll answer that. Right now, we’re looking at a number of different things that we can do in terms of process changes and systems enhancements. We’re still pretty much at the evaluation stage. There are a number of different things that we could do. We’re trying to figure out which would be the most effective for the business, and frankly we haven’t yet made that determination. In terms of timeframe, I would guess that it will be 2008 before we see any meaningful impact from any of the changes we’re going to make.

Dana Telsey, Telsey Advisory

And will that help your new store productivity in some of those other regions?

Michael B. O’Sullivan, Executive Vice President, CAO

Yes, that’s one of the primary goals, is to improve our assortment in new markets and…

Dana Telsey, Telsey Advisory

And John, how much will that cost and how much is in CapEx this year and next year?

John G. Call, Senior Vice President and Chief Financial Officer

For the CapEx, again we’re still in the form of state of trying to plan exactly what the system requirements will be and exactly what we’re going to do, so we haven’t actually put a bow around on what the costs will be at this point.

Dana Telsey, Telsey Advisory

Thank you.

Operator

Thank you. Our next question is coming from Margaret Mager of Goldman Sachs.

Margaret Mager, Goldman Sachs & Co.

Hi. You know, one of the things just observing your company over the past couple of years is that there’s just been a very long series of ongoing disappointments, and I’m sure that you’re disappointed too that things are just not coming together the way the market would hope or investors would hope. When do you think all the noise is behind you and you can really say that you’re on the right footing and heading in a very firm direction forward? Is this the second half of 2006, is it 2007 timeframe, when does all the noise stop in the Ross story?

Michael Balmuth, Vice Chairman, President and CEO

This is Michael Balmuth. We’re actually pleased with how we’re doing. We have said this is going to be a transition. We have said that we are going to make progress on certain issues and we’ve been marching along, making progress in topline. We’re now making progress in distribution. We’re seeing progress in our new markets. This is not a big bang from where we were to an instant success. We see that we are moving in the right direction and that’s what we’ve been articulating that we were going to do, and we are very pleased with where we sit. Given where our performance has been, the fact that this year we’re going to show a 16% to 22% EPS growth and one of key initiatives we are making progress on each and every one of them, we are actually feeling fairly good about the direction the Company is going in at this time.

Margaret Mager, Goldman Sachs & Co.

Okay, I thought I heard you say that you were working your inventory decisions based on 2003 data and this wasn’t a great thing for a retailer to be doing. So, I can’t imagine that you would consider that and not a disappointment or a frustration. Now, that’s the essence of the question, when will you really get to a place where you’re kind in the clear as far as decision making with appropriate historical numbers that you can feel really good that you’re making the right decisions.

Michael Balmuth, Vice Chairman, President and CEO

We are that spot now and also we’re not the first in retail to have a slight inventory problem in the quarter. It’s like any kind of systems issue. We just basically gave it to you the way we saw it.

Margaret Mager, Goldman Sachs & Co.

Okay. It’s been kind of a series of challenges managing the inventory as far as I can see. With regard to your comments again on the macroenvironment, how do you reconcile that with the fact that you’re running above plan in May. Is your caution regarding the consumer and gas prices just something to be aware of or is it really something that’s happening right now.

Michael Balmuth, Vice Chairman, President and CEO

Well, we’re not economists. We do have historical records that show it does impact retial performance. It has impacted our performance in the past. We are doing better than we’ve expected. We’re happy about that. We attribute that to probably better execution, a good availability of products in the markets. But there is something looming out over us and all resellers, and we’re just calling it out as a caution.

Margaret Mager, Goldman Sachs & Co.

Okay, thank you.

Operator

Thank you. Once again the floor is open for questions. If you wold like to ask a question, please press “*” and then the number “1” on your telephone keypad. Our next question is coming from Patrick McKeever of Avondale Partners.

Patrick McKeever, Avondale Partners

Thanks. I have a question on the efficiencies of the distribution side. I was just wondering if you could share a little bit on that one and talk about where the efficiencies are coming; is it primarily in labor, is it pretty evenly spread across your distribution centers, and can you see more improvement there over the next several quarters?

Gary L. Cribb, Executive Vice President and Chief Operations Officer

This is Gary, Patrick. I think as most people are aware, we finished our implantation of the standards in engineering project in the first quarter of this year. And as we anticipated and as we planned, we have seen and we’ll continue to see gradual improvement in productivity. To answer the question about where we’re seeing it, we are seeing it across our network and it’s in line, actually slightly exceeding expectations based on our plan, and we believe that we’ll continue to see similar improvements as we move forward.

John G. Call, Senior Vice President and Chief Financial Officer

I’ll also add that the first quarter number, the number I gave of 100 basis points was up against a softer number than last year. As we head through the back half of the year, we expect to see gradual improvements but not to the extent we did in the first quarter. We’ve also bringing on balance sheet and beginning to appreciate our Southeast DC which will also somewhat benefit; as Gary said, gradual improvement is what we expect.

Patrick McKeever, Avondale Partners

So, now it’s reached the implementation phase and all of the engineered standards project itself was wrapped in the first quarter and now it’s just a matter of implementing all the standards?

Gary L. Cribb, Executive Vice President and Chief Operations Officer

Yes, that’s correct. So, the standards are implemented now ands it’s really a matter of them continuing to gain traction and as people perform and executive consistently, they improve with time, and we’ll see over time gradual improvements accordingly.

Patrick McKeever, Avondale Partners

And you mentioned that the deliveries were making their way to the store more quickly than you had anticipated; maybe you share a little color on that one?

Gary L. Cribb, Executive Vice President and Chief Operations Officer

I think one of the added benefits of getting better is we get the goods through our DCs quicker and in turn get them into the stores in a faster period of time. I think that if anything we’re watching that, we’re anticipating that we are going to get that quicker and we exceeded our expectations slightly. Relative to quantifying that amount, I’ll give that to John.

John G. Call, Senior Vice President and Chief Financial Officer

Part of the issue, and in the first quarter we were just quicker to the store, which if you piece out that piece from where the products came from the DCs to the store quicker, meaning goods in the stores, gives us the opportunity to get inventories down the back half of the year.

Patrick McKeever, Avondale Partners

All right, thank you very much.

Operator

Thank you. Our next question is coming from Kim Dao of Pioneer Investments.

Kim Dao, Pioneer Investments

Good morning. First of all thank you for releasing your press release a little earlier this morning. I think that helped out some of us a bit. I might have missed it earlier in the call, I’m just wondering if you could clarify again when you expect to get the inventories kind of to your targeted level?

Michael Balmuth, Vice Chairman, President and CEO

We think we’re in reasonable position now and it will be gradually moving down through the next quarter. So I’d say in another 30 days we’ll be back at where we want and we should be able to maintain that through the remainder of the year.

Kim Dao, Pioneer Investments

Okay, great, that really shouldn’t be an issue going forward at all. Your sales are great for the quarter, I’m just wondering if you could comment a little bit on the impact of weather on the west coast, because presumably that actually had a negative impact.

Michael Balmuth, Vice Chairman, President and CEO

Well we say it was a negative. California certainly trailed the company. It was cold and wet and it is certainly not a positive to our key market.

Kim Dao, Pioneer Investments

Okay, great, thank you very much.

Operator

Thank you. We have a followup question coming from Kimberly Greenberger of Citigroup.

Kimberly Greenberger, Citigroup

Thanks. This question is for Michael O’Sullivan. What functionality have you started utilizing in your new system and what functionality you think you’ll have an opportunity to utilize in the future?

Michael B. O’Sullivan, Executive Vice President, CAO

The functionality we have in our system right now is basically providing all the information that different parts of the business need, actually providing that in quite a flexible form, and what I mean by that is being able to slice and dice the data in numerous different ways. So, it’s that kind of what we found. In terms of where we’d like to go, the platform that we have, the systems platform actually captures a lot more information than our older systems used to. So we have the potential to do a lot more, to take that information and use it to generate more sophisticated plans or more sophisticated forecasts. We’re looking at how we can utilize that, what process changes will be required, what systems enhancements might be required, that kind of the direction that we’re heading.

Kimberly Greenberger, Citigroup

Are you using it to look at markdown optimization or brand size, color or level of equipment spending?

Michael B. O’Sullivan, Executive Vice President, CAO

Both of those areas I think that we’re looking at in terms of potential for the future, so that’s part of the sort of consideration set of things that we would look at.

Michael Balmuth, Vice Chairman, President and CEO

Yeah, we have not turned those on yet.

Kimberly Greenberger, Citigroup

Okay, great, thanks.

Operator

Thank you. Our next question is coming from David Mann of Johnson Rice.

David Mann, Johnson Rice & Company

Yes, thank you. I just want to clarify a couple of things. On the shrink issue, I think you said you’re hopeful and expect to yield much better results after September. Have you taken any cycle counts thus far to support that?

Gary L. Cribb, Executive Vice President and Chief Operations Officer

This Gary, David. We have recently, literally recently, just completed some individual…really those inventories were designed to ensure that the initiatives that we had in place are appropriate and are having the desired impact and from a results perspective, it’s really too early to tell. As far as the impact on the total company, it would be inconsequential to the total company. We’re really using them just to ensure we’re doing to the right things. We’ll know the results for sure when we complete our full physical in September.

David Mann, Johnson Rice & Company

And then, John, on an earlier question about in-store productivity, I think you talked about 70% of I guess an average store volume. Can you reconcile with the time you made on the last call about the Southeastern stores being at 75% to 80%, are you talking about the same things?

John G. Call, Senior Vice President and Chief Financial Officer

That comment was related to new stores and new markets, and I didn’t say 70. I said in the 70.

David Mann, Johnson Rice & Company

Okay. So, it’s not a change in the performance?

John G. Call, Senior Vice President and Chief Financial Officer

No.

David Mann, Johnson Rice & Company

And then one last question on the gas price caution issue that you have out there that you have some concern about, is that an issue that is somewhat applicable for all markets equally or do you think that you have seen it historically more impacting California?

John G. Call, Senior Vice President and Chief Financial Officer

It’s probably a hard thing for me to say market by market. Our model is resilient in the sense that a certain amount of customers trade down when these things happen, but sometimes there’s a bump in the road and we don’t know exactly where that bump is, will we get resistance when we hit the bump. We’re able to re-price our product by buying opportunistically so we can get ourselves in line to what the customer is expecting reactive to other retailers who are promoting. Probably you have to say the market tends to rely more on driving, or in the winter months our colder markets would be hit harder.

David Mann, Johnson Rice & Company

Okay, but not necessarily an obvious bigger material bump in California?

John G. Call, Senior Vice President and Chief Financial Officer

No.

David Mann, Johnson Rice & Company

Okay, great, thank you.

Operator

Thank you. Our next question is coming from Mike Whitfield of Hahn Capital.

Michael Whitfield, Hahn Capital

Thanks good morning. I wanted to ask about the gross margins and you’ve mentioned some of the items that you’ve been working on, and if we were to get through a number of these items shrink, getting the merchandised systems up and running where we want them, can the gross margins approach what it did earlier this decade, 2002-2003 fiscal years?

John G. Call, Senior Vice President and Chief Financial Officer

Relative to the issues that we had, there are a couple of things going on in gross margins, not in merchandised margin. I think from a merchandised margin perspective, obviously sales and accelerating the sales, help to mark an outline and that’s one aspect of the margin. The other part in the embedded margin of the DC comp, which you’re talking about, we anticipate gradual improvement. And the shrink issue is what we’re working on. So, to your question, can we get back to historical levels in operating margins, we think over a period of time and we don’t put a timeframe around that, we’re making gradual improvement. As Michael said, we’re very pleased with where we are. We’re hitting the initiatives we need to hit, we’re seeing incremental improvement in operating margins, based on the earnings guidance that we have out there, indicate improvement in operating margins, so we’re please with where we are.

Michael Whitfield, Hahn Capital

Could you repeat what you said earlier about the impact of last year’s accruals for shrink and what was the impact there?

John G. Call, Senior Vice President and Chief Financial Officer

The impact in the third quarter was a catch up when we actually took our physicals. It was 195 basis points to that quarter. From that point in time, we had been at 35 to 40 basis points, more in shrink. As we get to the third quarter, we’ll look to see how much traction the initiatives got and what our shrink will be, and at that point in time we’ll put to report what that performance has been. As Gary indicated, we’re making progress in shrink and initiatives look like they’re taking both from execution sales point. We’ll know when we take fiscal.

Michael Whitfield, Hahn Capital

Thank you.

Operator

Thank you. As a final reminder, if you do have a question, please press “*” followed by “1” on your telephone keypad at this time. There appear to be no questions at this time.

Michael Balmuth, Vice Chairman, President and CEO

Okay, thank you all and have a very good day.

Operator

Thank you. This does conclude today’s Ross Stores Conference Call. You may disconnect you lines at this time and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts