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Ross Stores, Inc. (ROST)

F3Q07 Earnings Call

November 20, 2007 11:00 am ET

Executives

Michael Balmuth - CEO

Norman Ferber - Chairman

John Call – CFO

Michael O'Sullivan - CAO

Gary Cribb - COO

Kelly Loughnot - IR

Analysts

Michelle Clark - Morgan Stanley

Randy Konik - Bear Stearns

Paul Lejuez - Credit Suisse

Brian Tunick – JP Morgan

Kimberly Greenberger - Citi

Rob Wilson - Tiburon Research

Mark Montagna - C.L. King

Marni Shapiro - Retail Tracker

Patrick McKeever - Avondale Partners

Richard Jaffe - Stifel Nicolaus

David Mann - Johnson Rice

Dana Telsey - Telsey Advisory Group

Jeff Black - Lehman Brothers

Operator

Welcome to the Ross Stores third quarter 2007 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. (Operator Instructions) At this time, I would like to turn the call over to Michael Balmuth, Vice Chairman, President and Chief Executive Officer.

Michael Balmuth

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 third quarter performance, followed by our outlook and guidance for the fourth quarter. Afterwards, we will 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 2006 Form 10-K and Form 10-Q, on file with the SEC.

Today we reported earnings per share for the 13 weeks ended November 3 2007 of $0.36, up 16% compared to $0.31 for the 13 weeks ended October 28 2006. Net earnings for the quarter were $48.7 million compared to $43.9 million for the prior year period.

Sales for the 13 weeks ended November 3 2007 were $1.468 billion, up 8% over the third quarter of fiscal 2006. Comparable store sales for the third quarter of 2007 grew 1% on top of a 4% gain in the prior-year period.

Earnings per share for the nine months ended November 3 2007 also rose 16% to $1.21 from $1.04 for the nine months ended October 28 2006. Year-to-date net earnings were $166.6 million compared to $148.5 million for the prior-year period.

Sales for the nine months ended November 3 2007 were $4.324 billion, up 9% over the prior year. Comparable store sales year-to-date grew 1% on top of a 5% gain in the first nine months of 2006. Comparable store sales were within our forecasted range for the third quarter, despite the challenging macroeconomic climate and unseasonably warm weather across the country in September and October.

Geographic trends for the quarter were broad based. The strongest regions were the Northwest and Texas, where same-store sales grew in the mid single-digits; California comparable store sales were flat. The best performing merchandise departments for the quarter were dresses, home and shoes.

Our third quarter operating margin increased about 15 basis points. Total gross margin, inclusive of buying and distribution costs, expanded by about 45 basis points, partially offset by a 30 basis point increase in selling, general and administrative costs. Merchandise gross margin for the third quarter was better than expected and relatively flat to last year, even with same-store sales that were below forecast in September and October. These results benefited from the steps we took at the beginning of the quarter to lower inventories and drive faster in-store turns, which gained traction as we moved through the period.

We also completed our annual physical inventory of stores during the quarter with our shrink results showing a slight improvement over the amount we had reserved for. We estimate that better than planned shortage added about $0.01 in earnings per share to our third quarter results.

Cost of goods sold in the quarter also benefited from a 25 basis point decline in distribution expenses, due mainly to improve productivity. Other favorable operating margin trends included a slight improvement in freight costs and tight control of corporate expenses.

These positive results were partially offset by an increase in occupancy and store costs as a percent of sales, driven mainly by higher pre-opening rent compared to the prior year; an increase in the minimum wage; and a deleveraging effect of the 1% increase in comparable store sales during the period.

As we ended the third quarter, total consolidated inventories were up about 5% over the prior year. This was mainly a result of the growth in new stores, partially offset by average in-store inventories that were down about 9% from the prior year at the end of the period.

Packaway was about 30% of total inventories, compared to 31% in the prior year.

With respect to store openings, we added 24 new Ross locations during the quarter and a net 70 year-to-date, for a total of 841 stores in 27 states. We also opened seven dd's DISCOUNTS in the quarter for 26 new locations in 2007. We now have a total of 52 dd's DISCOUNTS in California, Florida, Texas and Arizona.

The original 26 dd's locations are all in California. These stores generated solid comparable sales gains during the first nine months of the year that were in line with plan. However, we are disappointed with the overall sales performance of the new dd's stores that we opened in 2007.

Although these new locations are subject to the same macro economic concerns that are impacting most retailers today, they should be operating at a higher level. We are performing an in depth analysis of these new locations, including their merchandise assortments, demographics and competitive positioning to gain a better understanding of the factors impacting these stores. For 2007, we expect a drag to pre-tax earnings from dd's DISCOUNTS to be about 40 basis points.

Turning to our balance sheet and cash flows, as we ended the quarter they remained strong and healthy. We ended the third quarter with $158 million in cash and short-term investments, and $150 million in long-term debt.

We continued to return capital to stockholders through both our repurchase and dividend programs. During the first nine months of 2007, we repurchased 5 million shares of common stock for an aggregate of $153 million. We expect to complete by year end the remaining $47 million authorization under our two-year, $400 million program authorized by our board of directors. We ended the third quarter with 135.5 million shares of common stock issued and outstanding.

Now let's talk about the fourth quarter. For the 13 weeks ending February 2, 2008 we continue to project same-store sales gains of 1% to 3%. We believe this remains a reasonable target for a number of reasons:

First, we are up against the easiest comparison of the year. For the first nine months of 2007, we were growing on top of a 5% increase for the year-to-date period in 2006. In the fourth quarter, we are up against only a 1% gain in the prior year.

Second, as mainstream retailers have been pulling back and becoming more conservative on their inventories, our improved liquidity has enabled us to take advantage of an abundance of great buying opportunities in the marketplace. This has allowed us to fill our stores with a wide assortment of terrific name-brand bargains.

Third, the businesses that are doing well for us this year, in particular home and the other gift-giving categories, become more important in the fourth quarter.

With our same-store sales target unchanged, we continue to project earnings per share for the period in the range of $0.62 to $0.68. Based on these projections, earnings per share for the fiscal year ending February 2, 2008 are forecast to be in the range of $1.83 to $1.89. This compares to $0.66 and $1.70 of earnings per share for the 2006 fourth quarter and fiscal year respectively.

Last year's fourth quarter and fiscal year results included an income equivalent to about $0.07 per share related to the 53rd week in fiscal 2006. On a comparable 52-week basis, our updated annual forecast for 2007 represents earnings per share growth of 12% to 16% over the prior year.

The operating statement assumptions that support our fourth quarter targets include:

  • Total sales that are expected to grow about 1% to 3% for the 13 weeks ending February 2 2008 compared to the 14 weeks ended February 3 2007. As a reminder, the 53rd week in 2006 added about $80 million in revenue to the fourth quarter.
  • As previously mentioned, we are planning comparable store sales on a day-for-day basis versus the prior year to be up 1% to 3% for the fourth quarter.
  • By month, we are planning same store sales up 2% to 4% in November; flat to up 2% in December; and up 1% to 3% in January.
  • In 2006, comparable store sales were flat in November and up 2% in December and January.
  • Our operating margin comparison in the fourth quarter also is being impacted by the 53rd week in 2006. We are forecasting operating margin for the fourth quarter of 2007 to be in the range of 8.5% to 9% compared to 9.3% last year. Last year, the extra week added about 55 basis points to our fourth quarter profit margin.
  • We expect no net interest income or expense in the fourth quarter.
  • Our tax rate is expected to be about 38% and we estimate weighted average diluted shares outstanding of about 136 million.

To sum up, we are entering the important holiday season defensively postured with lean inventories, tight expense controls and compelling bargains in our stores. In addition, the flexibility of our value focused business model enabled us to manage through more challenging economic climates with less volatility than full-price retailers. We can buy closer to need and with our liquid open to buy position, take advantage of the increased amounts of great closeouts in the market. So although the retail climate will likely be highly competitive this holiday season, we strongly believe that our stores will remain attractive destinations for our customers' holiday shopping needs.

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

Question-and-Answer Session

Operator

Your first question comes from Michelle Clark - Morgan Stanley.

Michelle Clark - Morgan Stanley

Can you break out the components of gross margin expansion by basis point contribution during the third quarter?

Secondly, I know with dd's you said you were doing an in-depth study, but the underperformance there has been going on for several quarters. If you can just comment on specifically why you think you are seeing a slower than expected ramp there, that would be helpful.

John Call

I'll take the first part related to the components of gross margin. As Michael mentioned in the prepared comments, EBIT margin levered by 15 basis points and gross margin levered by 45 basis points, the components of which were merchandise margin was flat, slightly below planned sales; freight levered by about 10 basis points; the DCs actually had about 25 basis points of improvement due to productivity gains; and, we had lower buying costs which include incentive plan costs and equity compensation expense of about 40 basis points. Those pluses were offset by a deleverage in store occupancy of about 30 basis points. So as I mentioned, margin levered by 45 basis points.

On the G&A line, store costs delevered by about 65 basis points, offset by leverage on corporate and back office expenses of about 35 basis points, so G&A delevered by 30. As I said, EBIT levered by about 15 basis points.

Michael O’Sullivan

Michelle, your second question was about dd's. Actually I will break dd's out. The dd's comp store performance this year -- basically stores that we'd opened prior to 2007 -- have actually performed pretty well, in line with our expectations.

The dd's new stores which I want to be a bit cautious, they've been opened for less than five months, on average. But given that, their performance has been mixed, lower than our expectations. We are tearing apart the different aspects of that. We are looking at real estate locations in terms of demographics and maybe non-demographic issues; we're looking at merchandise assortments in those stores; and we are looking at any competitive issues that there might be in those stores to try and get to the bottom of that underperformance in those new stores.

Michelle Clark - Morgan Stanley

How many of the dd's stores are in new markets for you?

John Call

of the 26 dd's stores we opened, about 16 are in newer markets; those being Arizona, Texas and Florida.

Operator

Your next question comes from Randy Konik - Bear Stearns.

Randy Konik - Bear Stearns

Can you just give us the ticket and traffic that contributed to your 3Q comp? Thinking about your 4Q comp guidance, can you just give us your assumption for ticket and traffic?

John Call

On ticket and traffic actually one comp in the quarter was all traffic driven. Our average basket was about flat. Those numbers remain pretty constant in our business. We'd expect the same in the fourth quarter.

Randy Konik - Bear Stearns

On the question about your packaway levels, they were ticked down year over year, I think you said 30%. With the department stores getting more promotional and having more inventory, heading into '08 given that it sounds like the retail environment is getting more challenging, how should we think about your level of packaways going forward?

Michael Balmuth

I think the buying opportunities have been very good. I think we will have to wait a little longer but I would think it wouldn't be much greater than our norm, but probably a little higher.

Randy Konik - Bear Stearns

Following up on the first question regarding dd's, it sounded like you're unhappy with the stores opened in 2007, 16 of the 26 in new markets. If we go back a couple of years with the Ross Stores having some trouble in the new markets, can you give us a sense of any differences you see with the new market problems with dd's versus the new market problems you had had in the past with Ross?

How do you think about your long-term real estate growth strategy into new markets for the two concepts, recognizing you haven't gone into new markets with Ross lately? When do you go back into new markets with Ross? Is anything changing there?

Michael O’Sullivan

On the dd's piece of that, frankly it's a little bit early. We're trying to diagnose the performance in those new stores now. Are similarities with Ross' experience in new markets? There may well be, but we don't know at this point. We need to get through that diagnosis first.

There was a second part to your question. Could you just repeat that?

Randy Konik - Bear Stearns

Just in thinking about the two concepts having some trouble in the new markets, does this change the way you think about your real estate growth strategy for the two concepts into new markets?

Michael O’Sullivan

It's a fair question. I think to be honest, once we've gotten through the diagnosis of the new dd's stores, if there are lessons from that for Ross, then we will certainly follow those, but it's a little early right now.

Operator

Your next question comes from Paul Lejuez - Credit Suisse.

Paul Lejuez - Credit Suisse

A question on gross margin. Could you remind us what gross margins look like in home versus apparel? Even within the categories, I'm just wondering what is happening to the gross margin in home products this year versus last year and the same, apparel versus apparel last year?

Michael O’Sullivan

I'd say home margins are slightly higher than apparel and home margins are holding fine. Apparel, it's been a little more difficult margin year.

Paul Lejuez - Credit Suisse

Out of the 26 stores dd's opened this year, how many of those were Albertson’s locations?

John Call

Of those 26 stores, 22 were Albertson’s locations.

Operator

Your next question comes from Brian Tunick - JP Morgan.

Brian Tunick - JP Morgan

Michael, a lot of fear out there, obviously, given your real estate concentration in California and Florida. Are you doing anything there either offensively or defensively from a marketing perspective or store payroll? Maybe if you could just talk about California and Florida, which really seems to be the market that is suffering?

Is there any reason to assume that there wouldn't be another share repurchase program? Obviously you've reloaded several times as we finished this one.

On the merchandise margin comment you just made on apparel, obviously your major competitor sounds like they are getting huge margin gains on apparel so we're just trying to figure out why you’re not there?

Michael Balmuth

In terms of marketing, we have a marketing program we are very comfortable with across the chain and we look at it continually for spend by market. Frankly, California and Florida, we're not doing anything that unique for marketing. We're expending our efforts really more on merchandising within the four walls and operations within the four walls.

On the share repurchase, we look at it every year at the end of the year with our board of directors and we will do the same this year.

Apparel margin for us versus our direct competitors, obviously I don't know the components of their margins and exactly how they are doing. I think our difficulties in margin or our slight erosion in margin in apparel is really more related to what's going on in the industry this year, which I think apparel is having a difficult time. We've made some changes to our strategies and our organization in apparel this year.

So it is a combination of things that led us to have a more difficult year in apparel.

Operator

Your next question comes from Kimberly Greenberger - Citi.

Kimberly Greenberger - Citi

John, I was hoping you could give us the basis points associated with the better than plan shrink results? I would assume that would be in your merchandise margin for the quarter. Is that correct?

John Call

That is correct, Kimberly. So as Michael mentioned in the prepared comments, shrink was better by about a penny from expectations. We have actually lowered our reserve somewhat throughout the year, so on an apples-to-apples basis in the third quarter, it was relatively flat. We took some of that benefit in Q1 and Q2.

Kimberly Greenberger - Citi

So the penny better flowed through Q1 and Q2, not Q3?

John Call

The penny better was relative to expectations, not relative to the comparable in Q3 last year. So the level of improvement year over year was flat versus '06 to '07. So we improved in '06, we also improved in '07. Last year was actually on a year-to-date basis, it benefited by about $0.02.

Kimberly Greenberger - Citi

Could you just remind us what comp you need in order to hold SG&A flat as a percentage of sales?

John Call

When we look at leverage points, we are really looking at our EBIT margins and what we've said is at about a 3% comp we should get about 30 basis points of leverage on that comp. Because store payroll is in the G&A line and those average store volumes have been flat over the past couple of years. We think of our leverage points not necessarily G&A, but in total.

Kimberly Greenberger - Citi

Also, can you just remind us when do we anniversary the higher pre-opening rent expenses? Is that done here in the third quarter?

Secondarily, when do we anniversary the increases in minimum wage in your wage base?

John Call

In the wage base, we have a bit more of minimum wage this year coming out of California. I think last year it was $0.75 an hour, this year it is another $0.50 an hour. So there will be a bit of that this year.

The first part of your question, Kimberly, was?

Kimberly Greenberger - Citi

The higher pre-opening rent that you referenced and the 30 basis point increase in occupancy, is that done this quarter here in 3Q or does that continue into 4Q as well?

John Call

No we won't open many stores in the fourth quarter so we are done with that this year based on the higher level of preopening expense.

Kimberly Greenberger - Citi

And that should actually go down in '08 because of fewer openings relative to '07? Is that correct?

John Call

Yes.

Operator

Your next question comes from Rob Wilson - Tiburon Research.

Rob Wilson - Tiburon Research

Could you help us with some guidance on merchandise margin expectation for Q4?

John Call

Relative to the quarter, Rob, our practice is to really talk about what our EBIT margins are going to look like. As Michael mentioned on guidance, depending on where we come out in comp on the low end we would probably be flat to down operating margin by about 25 basis points. If we do a 3%, we should be up around 25, 30 basis points. That is where I'd leave it.

Rob Wilson - Tiburon Research

Last quarter you did suggest that there is a promotional environment and you thought that merchandise margins would be challenged in Q3. I'm just wondering if you could give us some update there?

John Call

Our expectation is that the holidays will be challenging. In response to that, in response to where markdowns were the first part of the year, we took some quick action on inventory levels and inventory on an average store basis was down 9% in October. So as we roll through the fourth quarter, we'd expect our inventory balances to be defensively positioned and down in the mid to high single-digit levels which should help us preserve margin.

Rob Wilson - Tiburon Research

John, I believe last quarter you guided to $1 million of interest expense. I wondered what happened in Q3? Why was that lower?

John Call

We had some delays in CapEx spending so relative to our plan, I think there was about $30 million of CapEx that didn't occur as planned in the third quarter and it looks like that will probably flip over into next year as opposed to the fourth quarter as well.

Rob Wilson - Tiburon Research

What is your capital expenditure expectation for this year?

John Call

We're looking right now at about between $250 million and $260 million. As we came into the year, we thought it would be more like $290 million.

Operator

Your next question comes from Mark Montagna - C.L. King.

Mark Montagna - C.L. King

A question regarding dd's. It sounds like this year's class of stores is underperforming. If you look at the same time period of the initial nine months or so of your original stores that you opened in California back in '04 and say '05, how does this performance compare to that? Were those also underperforming in your expectations?

Michael O’Sullivan

That is one of the things that we're looking at as part of the diagnosis just to compare the ramp of those original dd's stores with these new dd's stores. Our hypothesis is that with the first group of dd's stores, it actually took a little while to figure out the customer and to make adjustments to the merchandise. We don't think that is the key driver this time around but anyways, we will look at that as part of the diagnosis that we're doing.

Mark Montagna - C.L. King

So it sounds like these stores are experiencing a similar ramp as what you had experienced previously? Is that fair?

Michael O’Sullivan

To the original dd's stores, is that what you mean?

Mark Montagna - C.L. King

Yes.

Michael O’Sullivan

No. These stores are weaker.

Mark Montagna - C.L. King

Could you tell us what your year-to-date comp is for California, Texas and Florida and what percentage of the stores are in each of those states and then what percentage of the sales come from each of those states, excluding dd's?

John Call

So relative to year-to-date comps in California are up 1%.What was the following question? I'm sorry.

Mark Montagna - C.L. King

Can you break it out with California, Texas and Florida?

John Call

Texas was up 1% as well; Florida was down 2% on a year-to-date basis, California was up 1%.

Mark Montagna - C.L. King

What percent of the stores are in each of those states?

John Call

About 23% of the stores are in California; 11% are in Florida; and I don't have Texas off the top of my head. A little bit more than that.

Mark Montagna - C.L. King

What percent of sales would be in each of those states?

John Call

In California, the sales are a little bit north of the total store count, 30% or so. Florida is probably similar to the store count, 11%, something like that. Texas is probably 12% to 13%.

Operator

Your next question comes from Marni Shapiro - Retail Tracker.

Marni Shapiro - Retail Tracker

We know there is a lot of inventory out there in apparel and in certain segments, obviously, and in home. I was curious if you are seeing good quality and good consistency in inventory as well in accessories, kids and dresses and some of the smaller segments that have done a little bit better?

If you could also just remind me, you guys typically don't open stores in the fourth quarter. If you could just remind me what your fourth quarter real estate plan is and any insights as to what the plans are for '08 at this point?

Michael Balmuth

On the supply issue even though accessories and dresses and to a lesser degree, kids, have been better businesses nationally than ladies apparel. There is plenty of supply out there at all different price lines.

John Call

On the fourth quarter store build, our practice is typically not to open stores during the fourth quarter. It's not going to change this year. Having said that, at the end of the year, we always look and prune our portfolio and so we will close a handful of stores.

Marni Shapiro - Retail Tracker

Any insight into '08 at this point?

John Call

We're actively working on that now. We will come out with the January sales release on guidance for '08.

Marni Shapiro - Retail Tracker

Great, guys. Good luck for the fourth quarter.

Operator

Your next question comes from Patrick McKeever - Avondale Partners.

Patrick McKeever - Avondale Partners

John, could you remind us of the prior plan for the margin hit from dd's that was expected this year? Was it 35 basis points?

John Call

Yes, that is where we were tracking. As Michael mentioned in his speech, it tracks more around 40 basis points now.

Patrick McKeever - Avondale Partners

So there was maybe a slight deterioration in the third quarter versus where things were in the second quarter?

John Call

That is correct.

Patrick McKeever - Avondale Partners

That is what you are trying to pinpoint, that you are saying you are just not there yet in terms of pinpointing what is going on?

John Call

It is a little early and we understand obviously they didn't come out of the box like we expected and we are diving into it.

Patrick McKeever - Avondale Partners

Why do you think it's not the macro environment, just given the lower income customer base and gas prices and all these other things that are out there that are hurting the spending power of lower income consumers?

Michael O’Sullivan

We think that may be a part of it, but it certainly doesn't explain the bulk of it. The dd's comp stores, remember we do have 26 stores that we came into the year with; they have actually done just fine. Those are all in California so if that factor that you described was a big driver, I think we would have seen it in those stores as well.

Patrick McKeever - Avondale Partners

Sure, that makes sense. I know you gave November guidance for 2% to 4% same-store sales growth, but we've got some important days here ahead of us. Could you comment on the month-to-date trend? It sounds like you've seen a pick up versus where things were in October?

John Call

Patrick, again, our practice is to report sales at the end of the month. I would just reiterate the fact that we have November planned at 2% to 4%; December planned at flat to 2%; and January 1% to 3%. I will leave it at that.

Operator

Your next question comes from Richard Jaffe - Stifel Nicolaus.

Richard Jaffe - Stifel Nicolaus

A question on packaway, your outlook for packaway, with the values and the opportunities in the marketplace, do you see packaway becoming a less important part of your strategy as you seek to maintain more liquidity?

If you could also comment on the days merchandise remains in packaway?

Michael Balmuth

Packaway will become slightly more important to our strategy depending on buying opportunities. If the buying opportunities continue to be as strong as they look right now, they will be a little more important to us and we will be better positioned for '08. That will always have a flexibility factor, based on the availability. We will be more liquid, we will be doing probably less goods upfront and we will be buying closer in so we will be holding back dollars all along.

Days in packaway, I haven't seen it grow at all. In fact, it is probably a little less the way we are running our inventory, it is probably a little tighter today. But I don't have an exact number with me.

Richard Jaffe - Stifel Nicolaus

I've seen the speedier turn, I was wondering if it had accelerated? Could you ballpark where you think it might be?

Michael Balmuth

I wouldn't want to ballpark it but I would expect it to be speedier. I think we could get back to you with that.

Richard Jaffe - Stifel Nicolaus

A follow-on with the shrink. If it was $0.01 a share, I'm assuming though that it could really impact your gross margin? I wasn't clear on that.

John Call

That is correct, it did impact gross margin.

Richard Jaffe - Stifel Nicolaus

What was the basis point impact of that?

John Call

Relative to where it was -- and again, that was versus expectation or what we had dialed into the guidance. Relative to last year the improvement was similar, so there was no real pick up from a basis point standpoint in margin.

Richard Jaffe - Stifel Nicolaus

It was just against your internal plan?

John Call

That is correct.

Operator

Your next question comes from David Mann - Johnson Rice.

David Mann - Johnson Rice

On the last conference call, you talked a little bit about some changes you'd made in Florida. Can you just give a sense on if you are seeing any traction to some of those changes?

Gary Cribb

We talked a lot about what we were doing operationally in Florida and I would say that we are seeing traction from a staffing perspective. The market has stabilized. I think store conditions; inventory levels, the shortage that we experienced there are falling back in line with our expectations. So overall, I would say operationally we are seeing the traction that we anticipated.

David Mann - Johnson Rice

Even though you are probably seeing a lower comp, are you seeing improved profitability in Florida yet?

John Call

I would say although the comp drove the chain, the contribution margin is improving. Not to where we want it to be, but improving.

Michael Balmuth

Dave, I think the true test in Florida will be with how we do in the fourth quarter. It will be in both the contribution and sales performance and the metrics we look at operationally. So far, we are seeing it moving in the right direction.

Operator

Your next question comes from Dana Telsey - Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

Can you talk a little bit about the direction of the product in the core Ross Stores? Anything of the more trend-right product that you had wanted to get into the assortment? What categories? How is it progressing, and timing? Thank you.

Gary Cribb

We are seeing progress in most of the areas, so we see progress in accessories, men's and home certainly continues to be a very strong performer. We see it in dresses. But in the rest of ladies apparel, it is coming a little slower. Part of that is the weakness in the industry, part of that is internal and we are working through that. But by and large, exclusive of all ladies except dresses, we are very happy with the progress we are making.

Operator

Your next question comes from Jeff Black - Lehman Brothers.

Jeff Black - Lehman Brothers

On the dresses, how important do dresses really become, John, in 2Q and in 3Q as a percent of your overall mix?

John Call

In which quarters?

Jeff Black - Lehman Brothers

In the last couple of quarters. It has been a standout category. How important is it over last year in terms of percent of mix?

Michael Balmuth

I don't know if we have that exact number handy, but I would tell you the comps have been in the 20% range. Dresses as we move forward into spring becomes an enormous business as a percent of total, so that is really the big upside here.

Jeff Black - Lehman Brothers

So you think the dress trends continue into spring, is the bottom line?

Michael Balmuth

Absolutely.

Jeff Black - Lehman Brothers

On the CapEx, John, what is the difference? What did you defer this year, what is the $30 million that we're talking about next year?

John Call

Related to some distribution center network improvements, a land purchase and some build outs we delayed a bit.

Jeff Black - Lehman Brothers

Speaking of the DC, I know you had the Moreno Valley DC and you had some freight improvements. Was that related to the DC coming online?

John Call

No, the freight improvements really related to expectations of where fuel was going to be versus last year. I think last year was $2.82 a gallon for diesel; this year we're at $2.89. I think that, although it didn't spike like we had anticipated, there were some improvements in cubing out trailers, et cetera, that we focused on.

John Call

Based on your dress question, it's probably around mid single-digits as a percent of contribution of the total.

Jeff Black - Lehman Brothers

One final one. On dd's, with the DC locked down presumably that's to have more growth. Have you locked in new leases for '08? Are we going to see dd's grow to the degree that we saw it grow this year? Is it safe to say we're going to take a wait and see approach on that one?

John Call

We are looking at that currently. In January or actually the first week in February when we come out with the guidance, we will be able to give you a lot clearer picture on what dd's is going to do.

Jeff Black - Lehman Brothers

Care to share anything with us in terms of what you've locked down in dd's leases though now since you presumably have those?

John Call

Not at this point. I will say we don't have an Albertson’s waiting in the wings.

Operator

Your next question comes from Kimberly Greenberger - Citi.

Kimberly Greenberger - Citi

I know that you are not giving official new store opening guidance for 2008, but as you are going through your planning process right now, are you re-thinking the way that you are approaching dd's growth until you're able to accurately diagnose what is going on there?

John Call

Restate the question, Kimberly?

Kimberly Greenberger - Citi

I know you are not giving official new store opening guidance for '08 yet. I think you said you were in the middle of the planning process around that. As you are trying to diagnose the issues at dd's on the new store openings here in '07, would you be more inclined to slow the growth at dd's until you come up with a real action plan for how to address those issues?

Michael Balmuth

Actually what I would say is that we are going through an in-depth analysis, as we've said. We are conservative people by nature. That is as far as I think I would go. We are certainly aware of how we are performing.

Operator

There appear to be no further questions at this time.

Michael Balmuth

Have a very good day and a good holiday season.

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Source: Ross Stores F3Q07 (Qtr End 10/31/07) Earnings Call Transcript
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