Ross Stores Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug.22.13 | About: Ross Stores, (ROST)

Ross Stores (NASDAQ:ROST)

Q2 2013 Earnings Call

August 22, 2013 4:15 pm ET

Executives

Michael Balmuth - Vice Chairman and Chief Executive Officer

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

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

Analysts

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

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

Jeffrey S. Stein - Northcoast Research

Michael Baker - Deutsche Bank AG, Research Division

Kimberly C. Greenberger - Morgan Stanley, Research Division

Irwin Bernard Boruchow - Sterne Agee & Leach Inc., Research Division

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

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

John D. Kernan - Cowen and Company, LLC, Research Division

Jessica Schoen - Barclays Capital, Research Division

Laura A. Champine - Canaccord Genuity, Research Division

Nancy Hilliker

Marni Shapiro - The Retail Tracker

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Patrick McKeever - MKM Partners LLC, Research Division

Operator

Good afternoon, and welcome to the Ross Stores Second Quarter 2013 Earnings Release Conference Call. [Operator Instructions] Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast as 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 2012 Form 10-K and fiscal 2013 Form 10-Q and 8-Ks on file with the SEC.

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

Michael Balmuth

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

We'll begin with a brief review of our second quarter and year-to-date performance, followed by our outlook for the second half and fiscal year. 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 better-than-expected results for the second quarter and first half of the year, which were mainly driven by above-plan sales and merchandise gross margin. Our performance for both the quarter and year-to-date periods continues to benefit from the solid execution of our core off-price strategy of delivering compelling name-brand bargains to today's value-focused consumers.

Earnings per share for the 13 weeks ended August 3, 2013, were $0.98, up 21% on top of a 27% gain in the prior year. Net earnings for the 2013 second quarter grew 17% to $213.1 million.

Second quarter sales rose 9% to $2,551,000,000, up from $2,341,000,000 in the second quarter of 2012. Comparable-store sales for the 13 weeks ended August 3, 2013, rose 4% over the 13 weeks ended August 4, 2012. This compared to a strong same-store sales gain of 7% for the 13 weeks ended July 28, 2012. For the 6 months ended August 3, 2013, earnings per share were $2.06, up from $1.74 last year. These results represented 18% increase on top of a 26% gain in the first half of 2012.

Net earnings for the period rose 15% to $447.7 million, up from $390.6 million last year. Sales for the first 6 months of 2013 increased 8% to $5,091,000,000, with comparable store sales up 3%, which was on top of a robust 8% gain in the prior-year period. The strongest merchandise categories for the quarter were Juniors and Accessories, while Texas and Florida were the top-performing regions.

For the second quarter, earnings before interest and taxes grew to a record 13.6% of sales, up from 12.8% last year. This increased level of profitability was driven by a 70-basis-point improvement in cost of goods sold, mainly due to higher merchandise gross margin and a 10-basis-point decline in selling, general and administrative expenses. John will provide some additional color on these operating margin trends in a few minutes.

As we ended the second quarter, total consolidated inventories increased about 9% compared to the prior year, with average in-store inventories down about 4%. Packaway as a percentage of total was 46% compared to 48% for the same period last year.

Like Ross, dd's sales and profitability also improved in the second quarter as both change continued to benefit from our ability to flow a larger percentage of fresh and exciting product to our stores. With respect to our expansion program, we now expect to open 88 Ross and dd's DISCOUNTS locations combined in 2013. As usual, this growth does not include our plan to close or relocate about 10 older stores by the end of the year.

Now John will provide further color on our second quarter results and details on our second half guidance.

John G. Call

Thank you, Michael. While we realized a slight increase in the number of transactions during the quarter, the 4% comparable store sales gain was mainly driven by growth in the size of the average basket. Operating margin grew about 80 basis points in the quarter to a record 13.6%.

A 70-basis-point improvement in cost of goods sold was mainly driven by higher merchandise margin, which grew by about 80 basis points over last year, including approximately 5 basis points from a lower shrink accrual. This improvement was partially offset by higher distribution costs that were up approximately 10 basis points, mainly due to the timing of packaway-related expenses.

Freight, occupancy and the buying costs were all the relatively even with last year as a percent of sales. Selling, general and administrative costs improved by about 10 basis points as result of leverage on the 4% increase in same-store sales.

During the second quarter, we repurchased 2.1 million shares for a total purchase price of $138 million. Year-to-date, we have bought back a total of 4.4 million shares for $277 million. We remain on track in 2013 to buy back about $550 million in common stock or about half of the 2-year $1.1 billion authorization approved at the beginning of 2013.

Let's turn now to our second half guidance. As a reminder, due to the 53rd week in 2012, all fiscal quarters are one week later in 2013 versus the prior year. While this shift is relatively neutral for the full year, it added about 1% to total sales growth in the first half. This benefit is expected to reverse and reduce fiscal sales growth by a similar amount in the second half, which is embedded in the following guidance.

For the 13 weeks ending November 2, 2013, we are projecting a same-store sales increase of 2% to 3% on top of a 6% increase in the third quarter of 2012. Third quarter 2013 earnings per share are forecast to be in the range of $0.75 to $0.78, up from $0.72 in last year's third quarter.

For the 13 weeks ending February 1, 2014, we are also planning same-store sales to be up 2% to 3%, on top of a 5% gain last year. Earnings per share are projected to be in the range of $0.99 to $1.03 compared to $1.07 for the 14 weeks ended February 2, 2013. As a reminder, the 53rd week last year added about $149 million in sales and $0.10 in earnings per share to the 2012 fourth quarter and fiscal year.

Now I'll provide some additional operating statement assumptions for our third quarter EPS targets. Total sales are expected to grow about 5% to 6%, driven by a combination of new store growth, and as previously mentioned, same-store sales that are forecast to be up 2% to 3% versus the same 13-week period last year that ended November 3, 2012.

We plan to open 33 new stores during the period, including 24 Ross Dress for Less and 9 dd's DISCOUNTS. We are targeting operating margin to decline 50 to 70 basis points versus last year for a projected range of 10.6% to 10.8%. About 40 basis points of the planned decline is due to the shortage comparison versus last year when our physical inventory results were better than expected and added about $0.02 to third quarter 2012 EPS.

The remainder reflects some de-leveraging on expenses. The same-store sales are in line with our guidance for a 2% to 3% increase. We are planning no net interest expense in the quarter. Our tax rate is expected to be about 36%, and weighted average diluted shares outstanding are estimated to be about 215 million.

Moving to our outlook for the full year. We are now projecting earnings per share for the 52 weeks ending February 1, 2014, to be in the range of $3.80 to $3.87. So again, as sales performed in line with our guidance for the second half, our updated forecast for fiscal 2013 would represent estimated EPS growth of 11% to 13% on a 52-week basis. This compares to strong prior year gains of 20% and 24%, respectively, in 2012 and 2011.

Now I'll turn the call back to Michael for closing comments.

Michael Balmuth

Thank you, John. While we are pleased with our better-than-expected year-to-date results, we believe it is prudent to maintain a somewhat cautious outlook for the remainder of the year for a number of reasons. These include the ongoing uncertainty in the macroeconomic environment, our own challenging multi-year comparisons and the potential for a more promotional and competitive retail climate.

This is especially true for the fourth quarter, which has a compressed holiday selling period due to 6 fewer shopping days between Thanksgiving and Christmas this year. Throughout the second half, we will continue to run our business with selling store inventories down in the low single-digit range. As an off-price retailer, we have the flexibility to buy closer to need, and at this point, have plenty of Open to Buy [ph] to take advantage of potential dislocations and opportunities in the marketplace over the balance of the year.

We are also staying intently focused on the key areas of our business that have allowed us to perform well for the past several years. Merchandising remains our top priority, and we plan to further strengthen the organization through investments in people, processes and technology.

In addition, we continue to fine tune and upgrade our planning and allocation systems and implement productivity enhancements and efficiencies throughout the company. Going forward, we plan to carefully execute these proven strategies, as they are the key to maximizing our prospects for earnings and revenue growth for both the near and long term.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from line of Daniel Hofkin from William Blair.

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

Just wanted to follow up a little bit on some of the category trends. And can you discuss -- I know the home department has been a particular area of focus since last fall. Can you update us on how that's been performing relative to your expectations, relative to the overall comp, for example? That would be my first question.

Michael Balmuth

Home, we're pleased with the progress we've made. And Home performed in line with the total store for the quarter. So we're happy with the progress we've made. We're right on track.

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

Okay, great. And in terms of the regional detail, can you just discuss quickly how -- obviously, the West Coast is a particularly important region for you, but how was that relative to your overall comp?

Michael B. O'Sullivan

The West Coast was pretty much in line with the chain comp. Actually, regionally, our comp performance was pretty broad based. I think in Michael's comments, he mentioned Florida and Texas as particularly strong. But frankly, other regions were -- did pretty well, too.

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

Okay. And then can you just, I guess, update us, where -- in terms of the systems -- kind of ongoing systems enhancements that you touched on, where do you feel like you are in that progression relative to -- I mean, is this just something that kind of you see being -- having a long runway ahead? Or do you think -- where do you stand in that?

Michael Balmuth

Charles [ph]?

Michael B. O'Sullivan

Well, Daniel, I think we're pretty far along in terms of the planning and allocation systems that we have in place. As you know, we rolled out micro-merchandising across the chain about 3 years ago. But part of the benefit of planning and allocating at a more detailed level is that that allows you to go for opportunities that you wouldn't otherwise see. So I think there are -- I think we expect that over the next few years, there are going to be opportunities down at individual classification levels or down at individual store or regional levels or even, frankly, looking at different clusters of stores, different segments of stores and spotting opportunities to turn faster and to guide margin and guide sales. So I think we feel pretty good about where we are from a systems point of view. But I think we can get quite a lot of opportunity to use other systems to really drive the business.

Operator

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

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

Question about the promotional environment. Most of the other major apparel retailers are talking about the fact that there was promotional pressure in the second quarter. Just curious if how you feel like -- there was any impact on you in the quarter? And whether you think that what you're looking at, going into the rest of the year?

Michael Balmuth

We thought it was typically promotional, okay, not unusually rugged, okay, but fairly typical. I think coming out of the second quarter, where all the major department stores and discounters struggled in the second quarter, they have plenty of time to be preparing, ramping up for a more promotional fourth quarter than they did -- than they were able to for the second quarter, which kind of -- I think quite a lot of people caught off guard.

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

Okay. And then in terms of the merchandise margin, there was -- it looks like a little bit of an acceleration there. It was a nice gain relative to the last few quarters. Perhaps, John, you can talk a little bit about, was that just better buying in IMU or better sell-through and less markdowns?

John G. Call

I think it was a bit of both, David. We saw a bit of both increase in the second quarter.

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

Okay. And then last question, on the ticket gain, the gain in average ticket driving same-store sales, are you seeing more units per transaction or just some average increase in price? How should we think about that, and that going forward as well?

Michael Balmuth

Yes. So with that, that was mixed as well, so we had a slightly more SKUs being purchased per basket. And also the AURs are up a little bit as well. And we were happy to see that, actually, traffic was positive as well.

Operator

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

Jeffrey S. Stein - Northcoast Research

A couple of questions. First of all, I want to make sure I heard this correctly. Because of the calendar shift, is there going to be a narrowing of the spread between comp in total because of that shift in the back half of the year?

John G. Call

Narrowing -- so explain that? What are you trying to get at, Jeff?

Jeffrey S. Stein - Northcoast Research

I think you mentioned -- somebody mentioned that there was -- you're going to get penalized by 1 percentage point in sales because of the calendar shift. Is that because you're giving up 1 week of higher volume in August and picking up 1 week of lower volume in November? I just wanted to make sure I'm understanding that correctly.

John G. Call

That's exactly right, Jeff. There were 2 counters which is off those weeks.

Jeffrey S. Stein - Northcoast Research

Okay. So -- okay. And my second question would be on the SG&A line. Why only 10 basis points of leverage on a 4% comp? I guess, what's embedded in your SG&A that is preventing you from seeing more leverage?

John G. Call

So on that, we think we lever typically around a 3%, so we did get some leverage on the 4% in the quarter. I wouldn't say there's anything unusual in the quarter that would either promote that or bring that down, so we actually felt pretty good about the leverage we got.

Jeffrey S. Stein - Northcoast Research

Okay, okay. Final question, and that is on the subject of outerwear. Now the industry has had 2 consecutive years of warmer-than-expected weather, and I'm just kind of wondering what the close-out environment is for outerwear this year? Are the vendors producing less, and therefore, you have less? Or do you have more in packaway from last year? How do you kind of see these seasonal apparel business shaping up for you this year?

Michael Balmuth

We're a little better -- we're better positioned than a year ago in packaway based on last year's performance globally. And this year's situation flows out, it's premature. Nobody's closing out outerwear this early. So it's a wait-and-see. It -- actually, the seasonal businesses happens later and later in the year. It makes it more difficult to secure close out in season. More is done in packaway. So we'll just have to wait and see.

Operator

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

Michael Baker - Deutsche Bank AG, Research Division

Mike Baker, so 2 or 3 questions. One, you ticked up your store count a little bit. You're going to open to 88 from 80, I believe. Can you discuss that? And secondly, maybe more importantly, can you talk about how your stores performed in the Midwest? You can calculate new store productivity. But at some of these stores, I think, in Chicago, we're starting to enter the comp base. Are you seeing outsized comps, because it matured [ph] -- I think last quarter, you said that they were -- I think you said slightly above plan? Can you update us on how those Chicago Midwest stores are doing?

Michael B. O'Sullivan

So Mike, you're right, we took our new store count up to 88, that's just a few more than we had planned at the beginning of the year. That's really just driven by real estate opportunities. In terms of your broader question about the Midwest, as you know, we entered the Midwest in the fall of 2011, so a little over 1.5 years ago. So this really just a handful of stores that are now in the comp base. So rather than commenting on those, I think what I'd say is we've been very happy with the performance, in general, of the stores that we've opened in that region over the past 1.5 years, both in terms of how they've done against their sales and earnings plans but also in terms of the customer feedback we've had in those markets. So we're feeling pretty good about our ability to build a strong business in that region over time.

Operator

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

Kimberly C. Greenberger - Morgan Stanley, Research Division

Michael, I'm wondering if you can talk about the Juniors business. It seems like Ross and TJX are the only 2 businesses out there that have a really strong Juniors business. And I'm just wondering, is there some sort of a focus on the category in particular inside the organization? Or are you seeing just better product available for this customer that's allowing you to drive this business? And then just stepping back, I think you've been doing a great job at cutting in-store inventory. And I want to say that I think you've started it back in the second half of 2007, and you've just been managing sort of at ever more conservative levels on in-store inventory. Do you still see an opportunity to cut inventory levels further? Is that helping your -- is that helping you guys to reduce clearance markdowns? And will the distribution centers that you have coming online over the next 1 to 2 years, do they actually help you manage even more conservative inventory levels?

Michael Balmuth

Okay. First, on the Junior question, I really can't speak for what other people are doing differently in juniors. The way we've approached it, we saw an opportunity a few years ago. We felt the Junior business was an opportunity for at least us. We organized our staffing that way. We positioned ourselves so we could take advantage of market opportunities. And that's really how we've done it. And we funded it appropriately in addition. So we run much more of a pure classification Junior business than maybe other people do, who maybe run more of a collections Junior business, and that has served us well.

Michael B. O'Sullivan

On your second question, Kimberly, about inventories, you're right, we've reduced inventories by about, actually, a little bit over 40% since the back half of 2007. And actually this year, we're planning to reduce inventories further, sort of in the low single-digit range. Longer term, we haven't put together our plans for next year. But I think we're absolutely going to look at whether there's additional opportunity there may be. And I think we feel good about our ability to sort of flow fresh merchandise to the stores, and that's really helped drive our sales over the last few years. Now in terms of what will be the driver of being able to reduce inventories further, the DCs may help, but I also think that just improved merchandising in terms of making sure we have the right product in the right store will also be a key enabler as well.

Kimberly C. Greenberger - Morgan Stanley, Research Division

That's really helpful. And I'm wondering if I can just ask one follow-up on the general environment. I know that there's a lot of volatility in general out in the retail environment, and in particular, it seems like in the department store space. So I know there's always plenty of inventory for you guys to buy, and there's substantially more available out there in any given season than you could possibly buy for your own stores. But are you seeing any kind of incremental dislocation, just given the volatility we're seeing in the environment? Or does it feel very much the same as 1 or 2 years ago?

Michael Balmuth

It's hard to answer. What I would say is that the dislocation that was really just reported in the time I've been in the off price for a while leads to a lot of opportunities. And since a lot of people were not forecasting this kind of performance, it invariably leads to a lot of products for the off price sector. We've been comfortable at the level of product we've seen so far this year. I only expect that it should be a little more advantageous than it's been even.

Operator

Your next question comes from line of Ike Boruchow from Sterne Agee.

Irwin Bernard Boruchow - Sterne Agee & Leach Inc., Research Division

I guess, question on your comp guidance. You're guiding a 2% to 3% comp for next year. The last 3 quarters, you guys have been guiding 1% to 2%. Just curious, are you feeling a little bit better right now about your end market demographic? Or has anything changed with how you view the world right now?

John G. Call

So I don't think anything's changed with how we viewed the world. Actually, as we laid out the year, it was pretty consistent. I mean, we did a 3% in the first quarter, 4% in the second quarter, and we just think a 2% to 3% is probably more appropriate place busy [ph] in the company.

Irwin Bernard Boruchow - Sterne Agee & Leach Inc., Research Division

Okay. And then, real quick follow-up. It looks like new store productivity was pretty strong in the quarter. Can you talk about the new store openings that you've seen in new markets and existing markets and how the stores are performing relative to plan?

Michael B. O'Sullivan

Sure. So yes, I would say actually, over the last couple of years, we've been pretty happy with how new stores have performed, both in existing markets and in new markets. And part of it is the same trends that are driving our comp store performance have helped our new stores as well, the fact that we have great merchandising, great value. And I also think with new stores, I think, we've done a better job of the planning and, operationally, opening those stores. So I think those things have contributed to a pretty satisfactory new store performance.

Operator

Your next question comes from line of Brian Tunick from JPMorgan.

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

Curious, it sounds like in the comments that you're saying the traffic, I think, has been moderating. I think this is a quarter or 2 now. So wondering why you think that traffic might be moderating? And any comments on your marketing spend plans for the second half, vis-à-vis trying to bring in a new customer, et cetera? I know you talked about the Junior side. And then on the second one is maybe just talk about on the 2,500 store target that you recently updated, what exactly is preventing you guys from accelerating even faster from a square footage growth perspective? Is it site availability, district managers, waiting for the distribution center, just maybe talk about what's prohibiting a faster rollout?

Michael B. O'Sullivan

All right, Brian. I'll try and answer your questions on traffic and marketing, and then I'll hand it over to John on the store's potential. On traffic, we've had -- over the last few years, we've had pretty significant traffic growth. And if you look at our annual comp growth, just over the last 4 years, what you see is 6% to 5%, 5%, 6%. So pretty strong comp performance, and traffic has been the major driver of that comp growth. So clearly, that would never going to on forever. At some point, traffic was going to moderate, and that's kind of how we viewed the last couple of quarters. And, obviously, as a retailer, we'd like to drive traffic higher, so the best way we can do that is to make sure that we have great bargains in the stores. And that's what we're focused on doing. I should say on the flip side, we're pretty happy that we're seeing increases in the average basket, which suggests that when customers are coming to the store, they are finding opportunities to spend more. On your point about marketing, I think we've said in the past that we think paid marketing can be very helpful in a way of reminding customers to come to our store, remind them that we have great value, great merchandise. But, frankly, we've always thought the best marketing for us is sort of unpaid marketing, word of mouth. And that really comes from making sure we have great value in the stores, the customer buys the goods, they go and tell their friends, et cetera. But that really remains our focus from a marketing point of view. Our paid marketing really hasn't changed in the last few years, so nothing new or radical in terms of marketing campaign.

Michael Balmuth

So as to the growth question, Brian, so we say we can basically double the size of the chain. That gives us, obviously, plenty of room to grow. The way we like to grow is not a tack 20 [ph] market at 1 specific time to not get too distracted by multiple fronts. And our growth pattern in the past has been growing to contiguous markets, and that's worked well for us. We have the ability and the systems and the people in place to sustain a 6% to 7% growth rate and do that well. And that's what we're going around. So we'll be steady and consistent with that growth pattern. So we're pretty comfortable with where we are today.

Operator

Your next question comes from line of Lorraine Hutchinson from Bank of America.

Lorraine Maikis Hutchinson - BofA Merrill Lynch, Research Division

I just wanted to follow up on your somewhat cautious back half outlook. Is that based on what you're seeing today in the macro environment? Or is that just anticipation of what could be a very heated promotional holiday season?

Michael B. O'Sullivan

Lorraine, it's a combination of things. I think, Michael, in his remarks, mentioned there is sort of continuing economic uncertainty. We are going to be anniversary-ing some big comp numbers over the last 3 or 4 years. There is a more compressed holiday shopping calendar. And then we are anticipating that there's at least a risk that the retail and competitive environment could be more promotional. So we've taken all those factors and tried to wave them into our guidance. Now we -- we always hope to do better, and I think over the last few years, we've demonstrated that when we plan conservatively, we're still able to chase the business if the sales are there. That approach has certainly helped us drive margins when the sales trend is running ahead of our plan.

Operator

Your next question comes from line of John Kernan from Cowen.

John D. Kernan - Cowen and Company, LLC, Research Division

I just wanted to get your thoughts on what you thought the long-term potential for merch margin and continued advances in that rate? It's been on an -- obviously, been on a upward trajectory since 2006. And how much more room is there to take that merch margin higher over time?

John G. Call

So John, we're happy with where it is. We believe it's sustainable. You're right, it has grown significantly over the past several years. It's really a function of what the top line can drive that. So if we can accelerate comps at a more meaningful level, then we'll get the fall through. But at the comps we have planned out today, we think that the margin is somewhat sustainable at those levels.

John D. Kernan - Cowen and Company, LLC, Research Division

And then, I guess, one follow-up would be any update on dd's and the sales trajectory within that chain and margin trajectory there as well?

Michael B. O'Sullivan

Sure. Well, John, as you know, we don't disclose dd's financials separately just because, at this point, it's not really material to the corporation. But, overall, I'd say, we continue to be happy with dd's performance. And this year, it's continued to exceed our sales and profit plans for the business. And, actually, one other notable point here is that like Ross, over the last 2 years, dd's has benefited from lower inventories and therefore, fresher merchandise, and that certainly helped it from a margin perspective. So I think, overall, we're very happy with dd's, as we have been in the last few years.

Operator

Your next question comes from line of Jessica Schoen from Barclays.

Jessica Schoen - Barclays Capital, Research Division

I'd have a follow-up question on the inventory levels in the quarter. In store, I believe, you said they were down about 4%. I was wondering if you could tell us if that was in line with your expectations? And if there's any further reduction that you're expecting as you continue to control your inventory level?

John G. Call

So the inventory levels were in line with our expectation for the quarter, and, I think, Michael O'Sullivan mentioned, we're anticipating inventory to be down in the low single digit in the back half.

Jessica Schoen - Barclays Capital, Research Division

And so as you continue to manage it, how much, going forward, in years to come, do you feel like there's a lot of incremental reduction that you could do?

Michael B. O'Sullivan

I wouldn't use the word "a lot". I think -- we think that there might be some additional opportunity based upon doing a better job of buying great merchandise and trying to flow merchandise to the store more rapidly. And we may be able to squeeze out more inventory. We haven't put together plans for next year yet, but that's certainly something we're going to look at.

Operator

Your next question comes from the line of Laura Champine from Canaccord.

Laura A. Champine - Canaccord Genuity, Research Division

John, could you give us an update on the CapEx budget for this year? And then where it should settle out in years beyond?

John G. Call

Sure. The CapEx budget is around $670 million this year. As we're building on a couple of DCs, we actually bought out the lease of 1 DC. As Michael mentioned, we're putting plans together for next year. And we'll announce those towards the end of the year, we'll have more updates on our CapEx plans going forward.

Laura A. Champine - Canaccord Genuity, Research Division

If I can ask a second question then. The margin pressure, you mentioned about 40 basis points comes from a change in shortage [ph]. Is the balance of the margin pressure just a typical lack of sales leverage on that 2% to 3% comp?

John G. Call

Yes, that's where it came from. And that's EBIT margin leverage. And you actually get some deleverage on some of the expense lines, with the 2% to 3% comp.

Operator

Your next question comes from line of Oliver Chen from Citigroup.

Nancy Hilliker

This is Nancy Hilliker, filling in for Oliver Chen. We'd like to know is that a bit more about your view in expansion. Are you targeting any regions in particular that you're thinking about going into? And are you seeing real estate opportunities given any retailers in the macro environment right now? And then also, just if you could comment on -- you've done so well in your current categories. Is there any room for expansion either in adjacent categories or bringing in a new brand?

Michael B. O'Sullivan

Nancy, on the first part of your question about regions and real estate, historically, our strategy, when we've moved into new markets, has been to expand in a fairly targeted way, so we open up in a market and then we build up our presence and share in that market before we move onto a whole new region. So given that we only entered the Midwest market 1.5 years ago, that's probably going to be our focus, I would say, for the next several years. And then on real estate, we continue to be happy with the real estate opportunities we're seeing. We have a great and very experienced real estate team who've done a great job of finding good locations for us in the last few years. And what we see in the pipeline remains very strong.

Michael Balmuth

And relative to new categories in the business, we're always testing and experimenting with new categories and looking for new brands. Unfortunately, we have a very large team of merchants scouring the market and building relationships. And we expect to have some new fresh and exciting things next year. But the forum would prevent me from going into it right now.

Operator

Your next question comes from Marni Shapiro from Retail Tracker.

Marni Shapiro - The Retail Tracker

Two questions. Just one on the uptick in the store openings. Is that spread throughout, or is any of that higher proportion to the Midwest, given the performance to date? And then just in the second half, any particular categories where you see bigger opportunity, either because of the first half performance or because of changes in the market?

John G. Call

So I'll take the question on the additional new stores. I mean, it isn't really concentrated in any one area. It just represented an opportunity for us to move up stores into this year, and it was relatively minor.

Michael Balmuth

On the categories, I believe that you asked about for the fourth quarter. Home would be one of them based on performance last year and the improvement schedule we're on and the improvement we've had in the previous quarter and Ladies Apparel & Accessories. We feel good about them also.

Operator

[Operator Instructions] Your next question comes from line of Neely Tamminga.

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Great. I just had a few follow-up questions here to today's conversation. First, if you can give us a little on dd's. As I'm thinking about the chain hitting about 120 new stores and heading towards 200 or so, does that put that chain that chain in a competitive advantage take on more, better product as it can be a one-stop solution for vendors looking for opportunities to clear? And then if I may also follow-up here. Could you just comment on the digital side of your business of marketing? Any thoughts maybe this year or next year to shift a little bit more towards digital marketing, really to help expand your social media footprint. That would be really helpful.

Michael Balmuth

On the first question relative to dd's. Was that relative to dd's carrying better product?

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Yes.

Michael Balmuth

Okay. The customers who dd's caters to is somewhat below the Ross customer. So we market very carefully through all these different urban areas have a very different balance of product in each of the stores. And so I would say, as we're expanding, we are getting better at micro-marketing in dd's as opposed to elevating the product line to a higher price line. And so our emphasis is really getting it right for the customer base we have, which is below the Ross customer.

Michael B. O'Sullivan

And then Neely, on your the question on your Digital Marketing, we have been investing in Digital Marketing over the last 2 years. It's become a bigger part of our marketing mix. And I think that we actually think there's some very interesting aspects, particularly with social marketing. And we're testing a number of things. And I would say that, yes, I think, it's quite likely that over the next few years, you'll see more growth in that area.

Operator

And your last question comes from the line of the Patrick McKeever from MKM Partners.

Patrick McKeever - MKM Partners LLC, Research Division

You had commented on past calls that the performance of your stores near a J.C. Penney store and those that are not so near is fairly similar. Was that still the case? Did that continue to be the case in the second quarter? I'm just wondering if you had any views on some of the recent changes there, with the return to promotional pricing and whatnot.

Michael B. O'Sullivan

Sure. So Patrick, we haven't seen any major change in terms of our stores’ performance-based upon their proximity to J.C. Penney. And I think our only view on the changes that are going on there is that over the long term, we don't think our long-term trend will be affected. I mean, we -- it's true that we actually performed very well last year when J.C. Penney was pursuing its new strategy. So, frankly, we've been performing very well for multiple years before that. So even if they return to their old strategy, we don't expect it to impact our long-term performance. That said, we do think there's some risks in the back half, but the overall retail environment will get more promotional, not only driven by J. C. Penney but potentially with other retailers, too. And we try to factor that risk into our guidance.

Patrick McKeever - MKM Partners LLC, Research Division

Okay. And then just back to the Juniors area. Was that a good area for you in the second quarter? And are you doing anything different to target that customer?

Michael Balmuth

It was a good business for us in the second quarter, as it's been for quite some time. And we're not doing anything materially different from market with that customer, okay? I think that customer were presenting a product that we believe is trend right at very strong values. And I think to the young consumer who is very pressed economically, and so value, coupled with trend right, is really our focus.

Patrick McKeever - MKM Partners LLC, Research Division

But you didn't see any change in trend like it appears -- as it appears to have been the case across the teen apparel space in the quarter?

Michael Balmuth

No, not for us.

Operator

There are no further questions at this time. I'd turn the call back over to the presenters.

Michael Balmuth

Thank you for joining us today and for your interest in Ross Stores. Have a wonderful remainder of the day.

Operator

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

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