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

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 |  About: Ross Stores, Inc. (ROST)
by: SA Transcripts

Operator

Welcome to the Ross Stores third quarter 2007 earningsrelease conference call. The call will begin with prepared comments by MichaelBalmuth -- Vice Chairman, President and Chief Executive Officer -- followed bya question-and-answer session. (Operator Instructions) At this time, I would like to turn the callover to Michael Balmuth, Vice Chairman, President and Chief Executive Officer.

Michael Balmuth

Good morning. Joining me on our call today are NormanFerber, Chairman of the Board; Gary Cribb, Executive Vice President and ChiefOperations Officer; Michael O'Sullivan, Executive Vice President and ChiefAdministrative Officer; John Call, Senior Vice President and Chief FinancialOfficer; and Katie Loughnot, Vice President of Investor Relations.

We'll begin our call today with a brief review of our third quarterperformance, 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 thiscall will contain forward-looking statements regarding expectations aboutfuture growth and financial results, and other matters that are based onmanagement's current forecast of aspects of the company's future business.

These forward-looking statements are subject to risks anduncertainties that could cause our actual results to differ materially fromhistorical results or current expectations. These risk factors are detailed intoday's press release and our fiscal 2006 Form 10-K and Form 10-Q, on file withthe 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 $48.7million 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 thirdquarter of fiscal 2006. Comparable store sales for the third quarter of 2007grew 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 $166.6million 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 prioryear. Comparable store sales year-to-date grew 1% on top of a 5% gain in thefirst nine months of 2006. Comparable store sales were within our forecastedrange for the third quarter, despite the challenging macroeconomic climate andunseasonably warm weather across the country in September and October.

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

Our third quarter operating margin increased about 15 basispoints. Total gross margin, inclusive of buying and distribution costs,expanded by about 45 basis points, partially offset by a 30 basis pointincrease in selling, general and administrative costs. Merchandise gross marginfor 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 quarterto lower inventories and drive faster in-store turns, which gained traction aswe moved through the period.

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

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

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

As we ended the third quarter, total consolidatedinventories were up about 5% over the prior year. This was mainly a result ofthe growth in new stores, partially offset by average in-store inventories thatwere 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 Rosslocations during the quarter and a net 70 year-to-date, for a total of 841stores in 27 states. We also opened seven dd's DISCOUNTS in the quarter for 26new locations in 2007. We now have a total of 52 dd's DISCOUNTS in California,Florida, Texasand Arizona.

The original 26 dd's locations are all in California.These stores generated solid comparable sales gains during the first ninemonths of the year that were in line with plan. However, we are disappointedwith 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 economicconcerns that are impacting most retailers today, they should be operating at ahigher level. We are performing an in depth analysis of these new locations,including their merchandise assortments, demographics and competitivepositioning to gain a better understanding of the factors impacting thesestores. For 2007, we expect a drag to pre-tax earnings from dd's DISCOUNTS tobe about 40 basis points.

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

We continued to return capital to stockholders through bothour repurchase and dividend programs. During the first nine months of 2007, werepurchased 5 million shares of common stock for an aggregate of $153 million. Weexpect to complete by year end the remaining $47 million authorization underour two-year, $400 million program authorized by our board of directors. Weended the third quarter with 135.5 million shares of common stock issued andoutstanding.

Now let's talk about the fourth quarter. For the 13 weeksending February 2, 2008 wecontinue to project same-store sales gains of 1% to 3%. We believe this remainsa 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 forthe year-to-date period in 2006. In thefourth quarter, we are up against only a 1% gain in the prior year.

Second, as mainstream retailers have been pulling back andbecoming more conservative on their inventories, our improved liquidity hasenabled us to take advantage of an abundance of great buying opportunities inthe marketplace. This has allowed us to fill our stores with a wide assortmentof 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 importantin the fourth quarter.

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

Last year's fourth quarter and fiscal year results includedan income equivalent to about $0.07 per share related to the 53rd week infiscal 2006. On a comparable 52-week basis, our updated annual forecast for2007 represents earnings per share growth of 12% to 16% over the prior year.

The operating statement assumptions that support our fourth quartertargets 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 seasondefensively postured with lean inventories, tight expense controls andcompelling bargains in our stores. In addition, the flexibility of our valuefocused business model enabled us to manage through more challenging economicclimates with less volatility than full-price retailers. We can buy closer toneed and with our liquid open to buy position, take advantage of the increasedamounts of great closeouts in the market. So although the retail climate willlikely be highly competitive this holiday season, we strongly believe that ourstores will remain attractive destinations for our customers' holiday shoppingneeds.

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

Question-and-AnswerSession

Operator

Your first question comes from Michelle Clark - MorganStanley.

Michelle Clark - Morgan Stanley

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

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

John Call

I'll take the first part related to the components of grossmargin. As Michael mentioned in the prepared comments, EBIT margin levered by15 basis points and gross margin levered by 45 basis points, the components ofwhich were merchandise margin was flat, slightly below planned sales; freightlevered by about 10 basis points; the DCs actually had about 25 basis points ofimprovement due to productivity gains; and, we had lower buying costs whichinclude incentive plan costs and equity compensation expense of about 40 basispoints. Those pluses were offset by a deleverage in store occupancy of about 30basis points. So as I mentioned, margin levered by 45 basis points.

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

Michael O’Sullivan

Michelle, your second question was about dd's. Actually I willbreak dd's out. The dd's comp store performance this year -- basically storesthat we'd opened prior to 2007 -- have actually performed pretty well, in linewith 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 tearingapart the different aspects of that. We are looking at real estate locations interms of demographics and maybe non-demographic issues; we're looking at merchandiseassortments in those stores; and we are looking at any competitive issues thatthere might be in those stores to try and get to the bottom of thatunderperformance 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 newermarkets; those being Arizona, Texasand 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 contributedto your 3Q comp? Thinking about your 4Q comp guidance, can you just give usyour assumption for ticket and traffic?

John Call

On ticket and traffic actually one comp in the quarter wasall traffic driven. Our average basket was about flat. Those numbers remainpretty 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 tickeddown year over year, I think you said 30%. With the department stores gettingmore promotional and having more inventory, heading into '08 given that itsounds like the retail environment is getting more challenging, how should wethink about your level of packaways going forward?

Michael Balmuth

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

Randy Konik - Bear Stearns

Following up on the first question regarding dd's, itsounded like you're unhappy with the stores opened in 2007, 16 of the 26 in new markets. If we go back acouple 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 problemswith 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 growthstrategy into new markets for the two concepts, recognizing you haven't goneinto new markets with Ross lately? When do you go back into new markets withRoss? 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 similaritieswith Ross' experience in new markets? There may well be, but we don't know atthis point. We need to get through that diagnosis first.

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

Randy Konik - Bear Stearns

Just in thinking about the two concepts having some troublein the new markets, does this change the way you think about your real estategrowth 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, butit'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 grossmargins look like in home versus apparel? Even within the categories, I'm justwondering what is happening to the gross margin in home products this yearversus last year and the same, apparel versus apparel last year?

Michael O’Sullivan

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

Paul Lejuez - Credit Suisse

Out of the 26 stores dd's opened this year, how many ofthose 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 realestate concentration in Californiaand Florida. Are you doinganything there either offensively or defensively from a marketing perspectiveor store payroll? Maybe if you could just talk about Californiaand Florida, which really seemsto be the market that is suffering?

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

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

Michael Balmuth

In terms ofmarketing, we have a marketing program we are very comfortable with across thechain and we look at it continually for spend by market. Frankly, Californiaand Florida, we're not doinganything that unique for marketing. We're expending our efforts really more onmerchandising within the four walls and operations within the four walls.

On the share repurchase, we look at it every year at the endof 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 aredoing. I think our difficulties in margin or our slight erosion in margin inapparel 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 toour strategies and our organization in apparel this year.

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

Operator

Your next question comes from Kimberly Greenberger - Citi.

KimberlyGreenberger - Citi

John, I was hoping you could give us the basis pointsassociated with the better than plan shrink results? I would assume that wouldbe 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 betterby about a penny from expectations. We have actually lowered our reservesomewhat throughout the year, so on an apples-to-apples basis in the thirdquarter, it was relatively flat. We took some of that benefit in Q1 and Q2.

KimberlyGreenberger - Citi

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

John Call

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

KimberlyGreenberger - Citi

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

John Call

When we look at leverage points, we are really looking atour EBIT margins and what we've said is at about a 3% comp we should get about30 basis points of leverage on that comp. Because store payroll is in theG&A line and those average store volumes have been flat over the pastcouple of years. We think of our leverage points not necessarily G&A, butin total.

KimberlyGreenberger - Citi

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

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

John Call

In the wage base, we have a bit more of minimum wage thisyear coming out of California. I think last year it was $0.75 an hour, thisyear 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?

KimberlyGreenberger - Citi

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

John Call

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

KimberlyGreenberger - Citi

And that should actually go down in '08 because of feweropenings 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 marginexpectation for Q4?

John Call

Relative to the quarter, Rob, our practice is to really talkabout what our EBIT margins are going to look like. As Michael mentioned onguidance, depending on where we come out in comp on the low end we wouldprobably be flat to down operating margin by about 25 basis points. If we do a3%, we should be up around 25, 30 basis points. That is where I'd leave it.

Rob Wilson - Tiburon Research

Last quarter you didsuggest that there is a promotional environment and you thought thatmerchandise margins would be challenged in Q3. I'm just wondering if you couldgive us some update there?

John Call

Our expectation is that the holidays will be challenging. Inresponse to that, in response to where markdowns were the first part of theyear, we took some quick action on inventory levels and inventory on an averagestore 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 themid 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 ofinterest expense. I wondered what happened in Q3? Why was that lower?

John Call

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

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 $290million.

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 classof stores is underperforming. If you look at the same time period of theinitial nine months or so of your original stores that you opened in Californiaback in '04 and say '05, how does this performance compare to that? Were thosealso underperforming in your expectations?

Michael O’Sullivan

That is one of thethings that we're looking at as part of the diagnosis just to compare the rampof those original dd's stores with these new dd's stores. Our hypothesis isthat with the first group of dd's stores, it actually took a little while tofigure out the customer and to make adjustments to the merchandise. We don'tthink that is the key driver this time around but anyways, we will look at thatas part of the diagnosis that we're doing.

Mark Montagna - C.L. King

So it sounds likethese stores are experiencing a similar ramp as what you had experiencedpreviously? Is that fair?

Michael O’Sullivan

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

Mark Montagna - C.L. King

Yes.

Michael O’Sullivan

No. These stores areweaker.

Mark Montagna - C.L. King

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

John Call

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

Mark Montagna - C.L. King

Can you break it outwith California, Texasand Florida?

John Call

Texas was up 1%as well; Florida was down 2% on ayear-to-date basis, Californiawas 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'thave Texas off the top of myhead. 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. Floridais probably similar to the store count, 11%, something like that. Texasis probably 12% to 13%.

Operator

Your next question comes from Marni Shapiro - RetailTracker.

Marni Shapiro - Retail Tracker

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

If you could also just remind me, you guys typically don'topen stores in the fourth quarter. If you could just remind me what your fourthquarter real estate plan is and any insights as to what the plans are for '08at this point?

Michael Balmuth

On the supply issueeven though accessories and dresses and to a lesser degree, kids, have beenbetter businesses nationally than ladies apparel. There is plenty of supply outthere at all different price lines.

John Call

On the fourth quarterstore build, our practice is typically not to open stores during the fourthquarter. It's not going to change this year. Having said that, at the end ofthe year, we always look and prune our portfolio and so we will close a handfulof 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 withthe January sales release on guidance for '08.

Marni Shapiro - Retail Tracker

Great, guys. Goodluck for the fourth quarter.

Operator

Your next question comes from Patrick McKeever - AvondalePartners.

Patrick McKeever - Avondale Partners

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

John Call

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

Patrick McKeever - Avondale Partners

So there was maybe aslight deterioration in the third quarter versus where things were in thesecond quarter?

John Call

That is correct.

Patrick McKeever - Avondale Partners

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

John Call

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

Patrick McKeever - Avondale Partners

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

Michael O’Sullivan

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

Patrick McKeever - Avondale Partners

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

John Call

Patrick, again, our practice is to report sales at the endof the month. I would just reiterate the fact that we have November planned at2% 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 - StifelNicolaus.

Richard Jaffe - Stifel Nicolaus

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

If you could also comment on the days merchandise remains inpackaway?

Michael Balmuth

Packaway will become slightly more important to our strategydepending on buying opportunities. If the buying opportunities continue to beas strong as they look right now, they will be a little more important to us andwe will be better positioned for '08. That will always have a flexibilityfactor, based on the availability. We will be more liquid, we will be doingprobably less goods upfront and we will be buying closer in so we will beholding back dollars all along.

Days in packaway, I haven't seen it grow at all. In fact, itis probably a little less the way we are running our inventory, it is probablya 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 hadaccelerated? Could you ballpark where you think it might be?

Michael Balmuth

I wouldn't want to ballpark it but I would expect it to bespeedier. 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'massuming though that it could really impact your gross margin? I wasn't clear on that.

John Call

That is correct, itdid 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 orwhat we had dialed into the guidance. Relative to last year the improvement wassimilar, 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 aboutsome changes you'd made in Florida.Can you just give a sense on if you are seeing any traction to some of thosechanges?

Gary Cribb

We talked a lot about what we were doing operationally in Floridaand I would say that we are seeing traction from a staffing perspective. Themarket has stabilized. I think storeconditions; inventory levels, the shortage that we experienced there arefalling back in line with our expectations. So overall, I would sayoperationally we are seeing the traction that we anticipated.

David Mann - Johnson Rice

Even though you are probably seeing a lower comp, are youseeing improved profitability in Floridayet?

John Call

I would say althoughthe comp drove the chain, the contribution margin is improving. Not to where wewant it to be, but improving.

Michael Balmuth

Dave, I think thetrue test in Florida will be withhow we do in the fourth quarter. It will be in both the contribution and salesperformance and the metrics we look at operationally. So far, we are seeing itmoving in the right direction.

Operator

Your next question comes from Dana Telsey - Telsey AdvisoryGroup.

Dana Telsey - Telsey Advisory Group

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

Gary Cribb

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

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 ofquarters. It has been a standout category. How important is it over last yearin terms of percent of mix?

Michael Balmuth

I don't know if wehave that exact number handy, but I would tell you the comps have been in the20% range. Dresses as we move forward into spring becomes an enormous businessas 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 thebottom line?

Michael Balmuth

Absolutely.

Jeff Black - Lehman Brothers

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

John Call

Related to some distribution center network improvements, aland 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 andyou had some freight improvements. Was that related to the DC coming online?

John Call

No, the freightimprovements really related to expectations of where fuel was going to beversus last year. I think last year was $2.82 a gallon for diesel; this yearwe'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 focusedon.

John Call

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

Jeff Black - Lehman Brothers

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

John Call

We are looking at that currently. In January or actually thefirst week in February when we come out with the guidance, we will be able togive 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'velocked down in dd's leases though now since you presumably have those?

John Call

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

Operator

Your next question comes from Kimberly Greenberger - Citi.

KimberlyGreenberger - Citi

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

John Call

Restate the question,Kimberly?

KimberlyGreenberger - Citi

I know you are notgiving official new store opening guidance for '08 yet. I think you said you werein the middle of the planning process around that. As you are trying todiagnose the issues at dd's on the new store openings here in '07, would you bemore inclined to slow the growth at dd's until you come up with a real actionplan for how to address those issues?

Michael Balmuth

Actually what I wouldsay is that we are going through an in-depth analysis, as we've said. We areconservative people by nature. That is as far as I think I would go. We arecertainly 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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