Ross Stores' (ROST) CEO Michael Balmuth on Q1 2014 Results - Earnings Call Transcript

| About: Ross Stores, (ROST)

Ross Stores, Inc. (NASDAQ:ROST)

Q1 2014 Results Earnings Conference Call

May 22, 2014, 04:00 PM ET

Executives

Norman Ferber - Chairman

Michael Balmuth - Vice Chairman and CEO

Michael Hartshorn - SVP and CFO

Michael O'Sullivan - President and COO

Gary Cribb - EVP, Stores and Loss Prevention

John Call - EVP, Finance and Legal

Connie Wong - IR

Barbara Rentler - President and CMO, Ross Dress for Less

Analysts

Brian J. Tunick - JPMorgan Chase & Company

Michael Baker - Deutsche Bank

David Mann - Johnson Rice & Company

Daniel Hofkin - William Blair

Stephen Grambling - Goldman Sachs

Paul Lejuez - Wells Fargo Securities

Bridget Weishaar - Morningstar

Lorraine Hutchinson - Bank of America

Tom Nikic - Sterne Agee

Kimberly Greenberger - Morgan Stanley

Neely Tamminga - Piper Jaffray

John Kernan – Cowen

Roxanne Meyer – UBS

Richard Jaffe - Stifle

Operator

Good afternoon, and welcome to the Ross Stores First Quarter 2014 Earnings Release Conference Call. The call will begin with prepared comments by management, followed by a question-and-answer session.

Before we get started, on behalf of Ross Stores, I would like to note that the comments made on this call will contain forward-looking statements regarding expectations about future growth and financial results, including sales and earnings forecasts and other matters that are based on the company's current forecast of aspects of its future business. These forward-looking statements are subject to risk and uncertainties that could cause actual results to differ materially from historical performance or current expectation. Risk factors are included in today's press release and the company's fiscal 2013 Form 10-K and fiscal 2014 Form 8-Ks on file with the SEC.

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

Michael Balmuth

Good afternoon. Joining me on our call today are Norman Ferber, Chairman of Board; 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, Senior Vice President and Chief Financial Officer; and Connie Wong, Director of Investor Relations. Also joining us today is Barbara Rentler, President and Chief Merchandising Officer of Ross Dress for Less.

As announced earlier this month, Barbara will become our new Chief Executive Officer and a Member of the Board of Directors, effective June 1. She will continue to work closely with Michael O'Sullivan, who will continue as President and Chief Operating Officer and also join the Board of Directors.

Barbara and Michael are talented executives with complementary skills and each has made extraordinary contributions to our company over the course of their long careers here. The Board and I are confident their successful partnership will enhance our prospects for continued increases in profitability and stockholder returns in the years to come.

As previously announced, I will become Executive Chairman on June 1. In my new role, I plan to stay very involved and continue to work closely with the entire Senior Management Team.

Now let's turn to today's financial results. We'll begin with a brief review of our first quarter performance, followed by our outlook for the second quarter and fiscal year. Afterwards, we'll be happy to respond to any questions you may have.

Earnings per share for the 13 weeks ended May 3, 2014, were $1.15, up from a $1.07 in the prior year. These results represent 7% growth on top of 15% and 26% gains in the first quarters of 2013 and 2012, respectively. Net earnings for the 2014 first quarter grew to $243.9 million, up from $234.6 million in the prior year period.

First quarter sales rose 6% to $2.681 billion. Comparable store sales grew 1% on top of 3% and 9% increases in the first quarters of 2013 and 2012, respectively.

First quarter earnings per share performed at the high end of our guidance as strict inventory and expense controls offset the impact from unfavorable weather and a more challenging retail environment. Sales trends improved in April with more seasonal spring weather that coincided with the late Easter shopping period.

Merchandizing geographic trends were relatively broad based during the quarter, with the Midwest, the top performing region.

Operating margin for the quarter was better than forecasted, declining 25 basis points to 14.6% of sales. A 35 basis point increase in cost of goods sold was partially offset by a 10 basis point improvement in selling, general and administrative costs.

As we ended the first quarter, total consolidated inventories increased about 2% compared to the prior year with average in-store inventories down about 4%. Packaway as a percentage of total inventories was 45%, even with last year.

Comparable store sales at dd's DISCOUNTS increased in the first quarter, driving solid gains and profits. These results reflect that customers continue to respond favorably to dd's merchandize assortments.

Our overall expansion program remains on track with 26 net new Ross and seven dd's DISCOUNTS opening in the first quarter. We expect to add a total of 95 new locations in 2014, comprised of approximately 75 Ross and 20 dd's DISCOUNTS. As usual, these opening numbers are before the planned closure or relocation of about 10 existing stores.

Michael Hartshorn will now provide further color on our first quarter results and details on our second quarter guidance.

Michael Hartshorn

Thank you, Michael. Our 1% comparable store sales gained in the first quarter was mainly driven by a low single digit percentage increase in the size of the average basket with the number of transactions down slightly to last year. Operating margin for the quarter declined by about 25 basis points to 14.6%, which was at the high end of our guidance.

The 35 basis-point increase in cost of goods sold was mainly driven by deleveraging on occupancy and buying costs, which increased 20 basis-points and 10 basis-points respectively. Merchandise gross margin declined 10 basis-points versus last year, while distribution cost improved by 5 basis-points.

Selling, general and administrative expenses improved by 10 basis-points, mainly due to strong cost controls. During the period, we repurchased two million shares for a total purchase price of $139 million. We expect to buyback a total of $550 million in stock for the year, which will complete the two-year $1.1 billion program authorized by our Board in early 2013.

Let's turn now to our second quarter guidance. For the 13 weeks ending August 2, 2014, we are targeting same store sales to increase 1% to 2% on top of 4% and 7% growth in the second quarters of 2013 and 2012, respectively. Earnings per share for the second quarter of 2014 are projected to be in the range of $1.05 to $1.09, up from $0.98 last year.

Our EPS targets for this year's second quarter are based on the following assumptions. Total sales are expected to grow 5% to 6%, driven by a combination of new store growth and as previously mentioned, same store sales that are forecasted to be up 1% to 2%. We plan to open 29 net new stores during the period, including 22 Ross Dress for Less and 7 dd's DISCOUNTS.

We are targeting operating margin to be flat to up 20 basis points on top of a strong 80 basis point increase in the prior year for projected range of 13.6% to 13.8%. We are planning net interest expense to be negligible and our tax rate is expected to be about 39%. We also estimated weighted average diluted shares outstanding of about $210 million.

Moving to our outlook for the year, as noted in today's press release, and based on our first-quarter results and second quarter guidance, we now project earnings per share for the 52-weeks ending January 31, 2015, to be in the range of $4.09 to $4.21, compared to earnings per share of $3.88 in fiscal 2013.

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

Michael Balmuth

Thank you, Michael. As mentioned earlier, we were able to maximize earnings during the first quarter, despite a modest 1% increase in same-store sales, which were impacted by unfavorable weather and a more challenging retail environment.

Looking ahead, we remain confident in the resilience of our off-price business model and our ability over time to successfully execute the proven strategies that have enabled us to deliver solid financial results in both favorable and more difficult climates.

By far, our most important priority is our unwavering focus on offering customers the best bargains possible. Consistently delivering on this mission, will always be the key to optimizing our opportunities for future sales and earnings growth.

At this point, we would like to open up the call in response to any questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Brian Tunick with JPMorgan.

Brian J. Tunick - JPMorgan Chase & Company

Great. Thanks very much and Michael, best of luck as well to you. I guess two question, number one, you called out the Midwest as your best performing region. So I know the weather had been in impact the last couple of quarters, can you just may be talk about what's changed there? Are you happier now with how your new stores are performing and anything else you could add about the micro-merchandising that might be applying?

And then the second question, just sort of on this potentially new trend of the business, this more low single digit comp run rate, can you may be talk about what kind of be their marketing initiatives, what things you are going to be doing from a category perspective that could potentially reaccelerate the business back to a more mid single digit comp trend, or do you think we've seen may be the easy market share gains behind us. Thanks very much.

Michael O'Sullivan

Okay Brian, this is Michael O'Sullivan, I'll take the first part of your -- first part of your question about Midwest. Yes, we were pleased with how the Midwest performed in the first quarter. As Michael said in his remarks it has the highest comp performance of our regions, which is great, especially given the weather.

And we made some assortment changes to the Midwest, which I would say we're pleased about, but I caution you, it's really just a single quarter and we still think we have plenty of opportunity left to improve that region.

Let me take a step back though. When we entered the Midwest two years ago, we said, we expected to build a very successful business there, but it will take time. So we are certainly very pleased with the progress we've made so far, but I would say the recent performance just reinforces our confidence in the longer term.

Then on the second part of the question, in terms of changes to our marketing program, there'll be no radical changes, okay. We have a marketing program we've been running with for a long time. We think it's effective. We are experimenting with a little more social marketing, but that's the extent of it.

Relative a new run rate, I think -- first of all, I think we've adjusted well, we adjusted well in the quarter to the business trends. We were able to preserve our margins and run our business quite effectively at this level.

When our business gets tougher than we would like it to be, we use this as a very good time for really tearing apart all our businesses whether they are performing at a reasonable level but especially the ones that are underperforming. So if we do our work carefully during this timeframe when the customer is ready to shop, we'll be in a better position than we are today.

Operator

Your next question is from Mike Baker with Deutsche Bank.

Michael Baker - Deutsche Bank

Thanks guys. I wonder if in general you just -- throughout the country, you could quantify for us a very good sense as to how much you think weather impacted and maybe one way you could do that is just talk about the trends. You said April was better, but any color on what February or March or even into early May, may've looked like as weather has gotten better. Thanks.

Michael Balmuth

Sure. So like other retailers, the unfavorable weather impacted our business early in the quarter. As we mentioned in our release, sales improved in April as the weather improved and also with the Easter shift.

It's difficult to quantify the precise impact of weather, but we are not immune to it based on our regional breakouts. Regionally the Midwest and Florida were the strongest markets, while the Mid Atlantic and Pacific Northwest trail the chain. California lastly was in line with the chain.

Michael Baker - Deutsche Bank

Okay. And if I could follow-up with one more, what are you seeing out of some of the partner stores, in particular I guess, I'll just specifically ask about JCPenney. They've gone from comping down 30 to comping up -- now comping up 6%; it's got to have some impact on your business. How you think about that? Is there any way to quantify or measure that? Thanks.

Michael Balmuth

Look, it's certainly not a plus. It's not -- we try to quantify it when they weren’t doing as well and we had difficulty quantifying it, but we knew it was helping. So really the answer to your question is we really don't have a precise answer.

Michael Baker - Deutsche Bank

Okay, but probably to the previous question may be it makes it harder to pick up market share, is that fair to say?

Michael Balmuth

It's hard to tell until we get through a more stable weather quarter, okay. It will be such a radically unusual weather quarter. I would rather answer that on our next call.

Michael Baker - Deutsche Bank

Fair enough. Good point. Okay. Thanks guys.

Operator

The next question is from David Mann with Johnson Rice.

David Mann - Johnson Rice & Company

Yes, thank you. Let me add my congratulations to Michael and well deserved promotions to Barbara and Michael as well. I had a question about gross margin. Can you talk about the components of gross margin? How we should think about them going forward especially given that you -- it looks like your inventory to sales ratio is the best it's been in like five quarters?

Michael Balmuth

Sure David. So as we got into this quarter, we ended, last quarter remember January was the slowest month of that quarter, so underperformed a bit. We were kind of bit more clearance into this quarter. So we took a few more markdowns to clear that inventory this quarter.

Having said that, in the first quarter, April was our strongest month, so we were in a different position going into the second. I would comment that with inventories down, we should be able to pick up a slight amount in markdown lines, similar to what we've done over the past several years.

David Mann - Johnson Rice & Company

And specifically any comments to give us about the direction of merchant margin over the course of the year and the other components of gross margin?

Michael Hartshorn

For the year, I think the guidance was slightly up from a merchandise standpoint given the one the two comp guidance, we would expect a little bit of deleverage on expense lines. Having said that, during the first quarter, we were able to manage expenses pretty aggressively and we'll look to do the same throughout the back half of the year in the second quarter as well.

David Mann - Johnson Rice & Company

And on that issue, the 1% comp you were able to do that on a 1% comp, you haven’t really been able to do that in the past, should that -- is that sort of a guide now going forward that you might be able to de-lever or to lever on a 1% type of comp?

Michael Hartshorn

No, on the expense David, long term, we think that number is still around 3%. So although we were aggressive during the quarter and as we look out at least in the near term, we were optimistic about where expenses will be, but I think for your long term modeling, I think it's just better to use a 3% leverage point.

David Mann - Johnson Rice & Company

Great. Thank you very much.

Operator

Your next question is from Daniel Hofkin with William Blair.

Daniel Hofkin - William Blair

Hi, good afternoon. Nice job in the quarter. So, if I could just kind of following-up on an earlier question specifically about JCPenney may be just more broadly, can you talk about, I know going into the quarter, you were talking about seeing higher promotional levels broadly than the same time last year, how did things play out compared to what you thought and what are you seeing kind of going into this part of the year? That's my first question.

Barbara Rentler

For Penney, promoted through the entire quarter and obviously there are increased promotional activities for us -- a lot of positive for us from a competitive point of view.

Michael Balmuth

I would just add also when Penney is just taking this kind of action on their promotional positioning, okay, it's expecting other moderate resellers who are also becoming more aggressive, so that's really the domino that we look at, within what our price phases and so for us to get a handle on how people will be promoting in the future, we are usually pretty good at that and then we'll be able to adjust our prices into a zone that keeps the value differential between the two, between mainstream and us.

So I think Penney is really more rattling other mainstream retailers and then we'll figure it out.

Daniel Hofkin - William Blair

Okay. And then…

Michael O'Sullivan

The other point to make on that Daniel is we've lived through promotional and competitive periods before and we had -- we are very confident we have a buying model and we have an expense structure that allows us to succeed in those environments and frankly to compete fairly sustainably. When other moderate retailers promote, it's not necessarily sustainable for them to keep doing that.

Daniel Hofkin - William Blair

And if that's the main factor kind of affecting the near term merge margin for you kind of above the pricing umbrella.

Michael Hartshorn

I think availability of merchandize has a lot to do with the merge margin. We think it's very good right now. We think that with their inventory controls in place, we'll be able to turn at the same levels or faster, so I think we feel pretty good about merge margin as long as we can deliver topline comp.

Michael O'Sullivan

Yes, I think Daniel, the impact of promotions is more on the topline rather than the margins, which is what you see in Q1, but the margins were actually pretty healthy with the topline.

Daniel Hofkin - William Blair

Okay. That actually was my follow-up question on the availability side. So it sounds like that remains quite positive. Good to hear. Thank you.

Operator

The next question is from Stephen Grambling with Goldman Sachs.

Stephen Grambling - Goldman Sachs

Good afternoon. And this is really just kind of a quick follow-up to that line of questions, which is on the merchandize margin versus competition, was it just harder to keep the pricing gap and as you think about weather playing an impact on gross margin, can you just elaborate on any impact that you saw whether as related to transportation or even just promotions by geographies?

Michael Hartshorn

So Stephen, back to gross margin, specifically in the first quarter, we came into the quarter carrying more clearance balances than we typically would based on a below plan January.

So that put pressure on the merchandize margins during the first quarter. Markups were more in line, but we had to take a little bit more markdown during the first quarter. So I would not attribute that to a trend or for the rest of the year.

Stephen Grambling - Goldman Sachs

That's helpful. And then just longer term as you think about the operating margin, I think in the last year actually in this quarter there was kind of a three prong commentary about the drivers over the past couple of years and as you look forward, maybe you can talk about how you think of margins and where they can go? Thanks.

Michael Hartshorn

Let me comment on that Steve. I think, when you look at what's driven our operating margin over the last few years, it really has been the three things that you referenced. It's been lower markdowns driven by tighter inventories. And we don't think that's going away, we're not going to loosen up inventories anytime soon. So we think we're going to hold those gains.

It's been secondly lower shrink based upon our shortest initiatives. And again we're not planning on taking our eye off the ball there. And then thirdly it's been margin and expense leverage based upon ahead of planned sales.

Now, if I look at which of those, we still have more opportunity on. It's really the third. It all depends on sales. If we're able to get ahead of planned sales, we'll get margin leverage.

I think there's probably limited opportunity left in markdowns and in shrink, some but limited. So going forward it's really about the topline.

Stephen Grambling - Goldman Sachs

Great. Thanks. Best of luck.

Michael Hartshorn

Thank you.

Operator

The next question is, we have, from Paul Lejuez with Wells Fargo. Your line is open.

Paul Lejuez - Wells Fargo Securities

Hey, thanks guys. Sorry if I missed it, but did you talk about the home category versus apparel and within home, I'm just wondering what's working and what's not.

And then also second, where is your AUR and your average ticket these days in both Ross and dd's. Do you see an opportunity there and what would be the driver? Thanks.

Michael Hartshorn

Paul this is Michael I'll take the transaction piece. As we mentioned in the comments, comp was driven by an increase in the basket, the transaction is down slightly. The increase in the basket was mainly driven by increase in units per transaction, but your question on AUR that was up slightly during the quarter.

Going forward, currently Ross is about 20% to 25% higher in terms of average AUR. And I think our focus is really on the price differentiation between department stores versus absolute prices.

Michael Balmuth

On the home aspect, okay, for the first quarter our home performance was well ahead of the chain. We're making progress there and we're making faster progress I would say on the -- on the parts of home that are really the more gift and functional end versus domestics.

Domestics is -- looks like it will be the section of the business that will come on last in terms of where we were trying to improve it. So, that's how I would divide it out to how it's going.

Paul Lejuez - Wells Fargo Securities, LLC, Research Division

What's included in domestics?

Michael Balmuth

Sheets, towels, pillows.

Paul Lejuez - Wells Fargo Securities, LLC, Research Division

Thanks guys. Good luck.

Michael Balmuth

Thanks.

Operator

The next question is from Bridget Weishaar with Morningstar.

Bridget Weishaar - Morningstar

Good morning. Congratulations on the quarter. Just a question on SG&A, it seemed a little bit better than expected, could you identify where the savings came from? Did you pull back from any marketing giving the weather overhang and shifting it into a different quarter or is there something else in that line item?

Michael Balmuth

Bridget, specific on marketing, we didn’t put anything back. We were more productive in stores in terms of some productivity initiatives that we had in place. Michael, if there was anything else?

Michael Hartshorn

No, I would say it was broad based. I would say in this competitive environment you should expect us to see very vigilant about controlling expenses throughout the year.

Bridget Weishaar - Morningstar

And do you see more room in there that you could cut back from or are you pretty close to running as lean as you can?

Michael Hartshorn

I would say, John mentioned that our long term model is really to lever SG&A at about 3%. I think there is a good opportunity for us to lever below that this year.

Bridget Weishaar - Morningstar

Great. Thank you.

Operator

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

Lorraine Hutchinson - Bank of America

Thank you. Good afternoon. Given the strength of some of your new store openings throughout the Midwest, does this give you more confidence to look at other geographies that are perhaps under penetrated?

Michael Balmuth

Yes. Our geographic expansion strategy, going back way back when there's always been to when we move into a new market to try and build out our presence in that market before we move on to another market so to speak.

We thought it was well for us, because there are numerous benefits and synergies that come with that in terms of building awareness, building our operating team etcetera.

So, I think you should expect that most of our activities in the next few years with regard to new markets will be in that Midwest region. Even though, we're happy with the results, I don't see us jumping out of that region into other regions prematurely.

Lorraine Hutchinson - Bank of America

Thank you.

Operator

The next question is from Oliver Chen with Citi.

Oliver Chen - Citigroup Inc

Thank you. We just had a question regarding the planning and allocation side of the business. You've been great pioneers in micro-merchandising. What are your thoughts about what anything in there and if that's a potential driver?

Also just from a strategy perspective, we understand that the shipping costs are prohibitive from an online basis, but would there be a scenario in which a bigger online presence would make sense for you down the road?

Michael Balmuth

So, Oliver the team has done -- can you just repeat your specific question on micro-merchandising.

Oliver Chen - Citigroup Inc

If there is a lot of opportunity in that than going forward in terms of further tailoring the assortments on a local basis?

Michael Balmuth

So, on that piece, on micro-merchandising, we've had the micro-merchandising processes and tools in place for about 2.5, three years at this point. And we're very happy with how they've been working for us, how they've been helping us. And I think we believe they've been a key enabler [of us] (ph) to turn faster in particular.

And therefore many of the inventory reductions that we've achieved and we've spoken about, I think you can tie back to micro merchandising.

Now one of the things that we described early on was that the micro-merchandising system we have sort of learned from experience. So the more years you have, the more years of accumulated data, the better it gets at projecting what sells and inventory levels we should plan to. So, yes, I think there is some incremental opportunity as we move forward.

Secondly, e-commerce, so, we continue to look at e-commerce. We run a business that has a $10 average unit retail. And when we put together the economics currently, we think it's very hard for people to make money. Not just shipping cost but return cost, processing cost, marketing cost etcetera.

Now, maybe things will change, but maybe someone in some way that leads us to change our mind. But at least as we look at the data right now, we don't, it doesn't seem very compelling to us.

So, our focus is really to put our resources against our bricks-and-mortar business, where we know we can be very successful, we know we can make money. And we have plenty of opportunity ahead of us.

Oliver Chen - Citigroup Inc

Okay. Thanks. And would you mind just updating us on your thoughts on the help of the consumer in terms of pressures you're seeing. Do you feel like there is still a lot of volatility, or do you think housing has been a help or just your thoughts on where you think sentiment is with your customer base.

Michael Balmuth

We're not economists. But what we know is the customer - the customer who is the moderate base customer appears to have some difficulties right now and so, if you're -- the word is health, they seem to have a little bit of a health problem right now.

Oliver Chen - Citigroup Inc

Thank you. Best regards.

Michael Balmuth

Thank you.

Operator

The next question is from Ike Boruchow with Sterne Agee.

Tom Nikic - Sterne Agee

Hi. This is actually Tom Nikic on for Ike. Thanks for taking my call. I was just wondering about the packaway inventory, I guess we would have thought that, with the disruption that happened in the retails base that maybe the packaway as percentage of inventory would take up. But it's flat for a couple of years in a row now.

I was wondering if you could just discuss the packaway situation. Thanks very much.

Michael Balmuth

We've been pretty happy with our packaway availability, Tom. It does fluctuate, it can move around. And typically we see more packaway opportunities in the second half of the season, rather than the first half of the season. But I would say that availability has been recently strong and we are pretty happy with what we're seeing that we're packing away.

Michael Hartshorn

And what we're seeing, we're happy, we're happy in what we're seeing both in quantity and just their actual quality of what's out there these days. Okay. As you would expect, as mainstream retail is suffering a bit.

Tom Nikic - Sterne Agee & Leach Inc., Research Division

Okay. Thanks very much.

Operator

The next question is from Kimberly Greenberger with Morgan Stanley.

Kimberly Greenberger - Morgan Stanley

Thank you. Michael, I'm trying to just understand a little bit more your weather comments, maybe you could help us by dimensionalizing perhaps the difference between Mid-Atlantic comps and some of your warmer weather markets, not necessarily Florida, because that’s been a standout for a while, but just so we can understand the magnitude of the difference. And then did you say California chain I was just wasn’t sure if I heard that correct?

Michael Balmuth

Kim, really we wouldn’t talk about specifics on regional other than to say they are higher and lower than the chain. But on your California question, it was in line with the chain.

Kimberly Greenberger - Morgan Stanley

Okay, California is in line with the chain. Was the Mid Atlantic -- was the Mid Atlantic in the northwest area is the only area where you feel like you have some weather impact. Were there other things going on in the Rocky Mountain region or other places that you felt also hurt your business?

Michael Balmuth

I would say we had weather impact throughout many of our regions. And Pacific Northwest was up against very strong comps. It was their strongest performing region last year.

Kimberly Greenberger - Morgan Stanley

I’m just trying to figure out how it was that the Midwest, which had really terrible weather, was one of your best performing regions. And is it just more experience in the market, better execution on your part that was able to overcome the weather headwinds or is there something else that would explain why the Midwest was quite good where the rest of the chain was hit by weather?

Michael Balmuth

Kimberly, I think the Midwest is a good case example of why retailers should never blame the weather. We mentioned the weather because obviously it was relevant in Q1. But when we look at the Midwest, there are lots of other things that can drive your top line certainly over the period of this quarter that can trump weather. And I think some of the changes that we're able to make in terms of assortment certainly had that impact in the first quarter.

So, I know you’re trying to quantify the impact of weather, but I think it’s very hard over the period of quarter. So, that like a single weather event like a hurricane, where a dozen stores close down, you can quantify the number, but over the whole of a quarter. The changes you can make in assortments and values you can offer in the store can trump the weather impact, that’s what we think happened in the Midwest.

Kimberly Greenberger - Morgan Stanley

Okay, understood. Thank you. And then just looking at your second quarter guidance, you’re talking about a 1% to 2% comp that’s in line with the guidance you gave for the first quarter. Does that feel conservative to you, does that feel appropriate? I am just looking at to the second quarter and it doesn’t feel like there should be much in the way of weather impact and I just wanted to get your feel for how you assess that view?

Michael Balmuth

Kimberly, I think it feels appropriate right now in this environment. As Michael said the moderate consumers have a tough time looking out and hearing other people report. I think it's pretty tough business out there. So we feel that it’s appropriately said.

Michael O'Sullivan

Additionally, it’s to be determined how the promotional environment will be, both in this quarter coming up and the rest of the year.

Kimberly Greenberger - Morgan Stanley

Okay. Thank you.

Operator

Your next question is from Laura Champine with Canaccord.

Laura Champine - Canaccord

Good afternoon. Could you comment on your sell through of seasonal women’s apparel this spring versus last spring this time of year?

Michael Balmuth

Laura, I don’t think the comfort going down to that level, like kind of category level. With women’s apparel, I think what we would be comfortable to say is, non-apparel has performed better given the weather conditions and so our sell-throughs would be better in non-apparel areas than apparel areas season to date.

Laura Champine - Canaccord

I guess the point of question is, you mentioned that merchandise margin, you should get a little bit of a lift as we move through the year, should we expect most of that in back half or do we start to see it this quarter?

Michael Balmuth

I think you could expect to see it even throughout from this period going forward. Again, we’re not -- the point of the first quarter is we are carrying more clarity for that period, so our markdowns were higher than we had targeted.

Laura Champine - Canaccord

Got it. Thank you.

Operator

The next question is from Neely Tamminga with Piper Jaffray.

Neely Tamminga - Piper Jaffray

Great. Thank you. Just a quick clarification on Q2 guidance. Michael, are you saying that you’re looking for the underlying metrics to be comfortable for Q2 in terms of the number of transactions and average transaction size value or is there a shift that we should be looking for?

Michael Balmuth

We don’t -- we typically Neely we don’t plan the business based on the transaction size, really the overall comp. So based on a one to two, we’d say it's going to somewhat consistent with what's going on with Q1 absent the weather.

Neely Tamminga - Piper Jaffray

Okay. And then just a follow-up question to Laura's question, I guess, not necessarily wanting you to get all the competitive away, but are you feeling good about the balance that you have in your apparel right now around active versus denim -anchored fashion looks? Thank you.

Michael Balmuth

You know something, I think we feel relatively okay. There are some mix issues underneath the lines, but our balance of how we’re mixed across categories, we feel okay there.

Neely Tamminga - Piper Jaffray

Okay. Thank you very much. Good luck.

Speaker

Okay. Thanks.

Operator

The next question is from John Kernan with Cowen.

John Kernan - Cowen

Good afternoon, guys. Just lot of good questions so far. I just wanted ask you on your real estate availability as you pushed out of the core markets in California, Texas and Florida, what you’re seeing in terms of availability and quality of sight?

Michael Balmuth

We’re pretty happy. We are one of the few retailers that’s hoping 80, 90 stores a year. So we’re out there. We’re looking for locations. We have a very, very strong real estate team that have got lot of experience and they’ve been able to find us some great locations over the last several years and we think availability continues to be good.

Obviously part of that has been driving by other retailers who've either gone bankrupt or out of business or retailers that has have closed down a lot of locations, so that's continuing to help us.

John Kernan - Cowen

Are you noticing any pressure -- you're obviously co-located with a lot of retailers that have been complaining about more meaningful declines in traffic then you’re seeing. So are you worried that some of the collocation with some other stores and the lack of traffic there might be pressuring you as well?

Michael Balmuth

Who knows, the key implication for us in those locations, to make sure that we’re offering the sharpest values that we can and therefore whatever traffic is coming to that center that we get more than our fair share of it. So, if that something macroeconomic that’s going on that's affecting our center or more global that we can’t control. There’s not much we can about that, but when we focus on what we can control which is the value in the store.

John Kernan - Cowen

Okay. Thank you.

Operator

Your next question is from Roxanne Meyer with UBS.

Roxanne Meyer -- UBS

Great, thanks, good afternoon and congrats on a great performance in a really tough quarter. My question is, wondering if you could comment on new store performance and how that has trended and then comment on the ramp to maturity of new stores, how long it takes and have you seen any changes in that ramp and also just comment on new store performance by classes over the last few years? Thanks.

Michael Balmuth

So Roxanne, yes. We’re pretty happy with how new stores have been performing not just in the last quarter but over the last couple of years. In terms of new store ramp, we don’t disclose the ramp but it’s been fairly consistent over time, obviously when a store first opens up, there’s sort of a period where it build awareness and for us though the awareness is mostly through word-of-mouth and that will take little bit of time. So after three or four years typically the store ramps up, but yes, that’s how I would describe it.

Roxanne Meyer - UBS

Okay. Great, thanks.

Operator

Your next question is from Richard Jaffe with Stifle.

Richard Jaffe - Stifle

Thanks very much guys. Given your comment earlier about the tighter inventory resulting in fewer markdowns, that's been a real success story for you guys. I’m wondering if -- as you mentioned there is less opportunity there, should we assume inventory levels will proceed at essentially a flat level year-over-year on a per square foot basis that there is no further pursuit to make your inventories leaner or turn more quickly?

John Call

I think -- Richard, this is John. We have obviously taken big chunks of (inaudible) over the past three, four years. We’re still working at it. We think there is some marginal benefit. We think inventories will be down probably one or two points this year. So there's still some opportunity.

Richard Jaffe - Stifle

Great. Thanks very much.

Operator

There are no further questions at this time. I will 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 great day.

Operator

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

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