Ross Notes Challenges, Posts Strong Quarter

Pleasanton, Calif.— Ross Stores, Inc. posted strong second quarter numbers despite a higher level of markdowns associated with new systems procedures and increased costs related to its distribution centers.

Michael Balmuth, vice chairman, president and CEO, said that inventory issues around actual versus planned sales also affected markdown levels in addition to the new systems issues.

“We think we have addressed the issues with enhancements to the systems and training. As a result, we project that the impact on margins should diminish going forward,” he said.

Balmuth also noted that increased costs associated with the company's DCs in Perris, Calif., and Fort Mill, S.C., were partially offset by a higher level of productivity. “We expect year-over-year improvements in the back half of 2005 and into 2006,” he added.

The company also maintains a DC in Carlisle, Pa.

To further extract productivity from the new DCs, Balmuth said the company has brought in industrial engineers to check each area of the facilities and establish new procedures.

The company opened 19 Ross stores and 3 dd's Discount units during the quarter. “Sales at dd's are progressing in line as planned,” he said, adding that the company expects to open another seven dd's in the third quarter. All 10 new dd's will be located in California. In total, the company expects to open 40 new stores in the third quarter — 33 Ross locations and seven dd's.

Balmuth said he thinks Ross and dd's can have 1,000 locations by the end of 2008, “with room still to grow.” Today, the company operates 695 locations.

But expansion comes with risks, and Balmuth noted that the company was not happy with some of its new locations in new markets. “We are working through that now, but would rather discuss it in November (during the third quarter conference call),” he said, noting that he was referring to 50 to 60 units.

“This is not endemic to all new markets. We are looking at new stores in new markets and trying to understand what we need to do internally to drive productivity,” Balmuth said.

In terms of long-range goals, Balmuth said the company plans on taking a more measured approach than it has used in the past few years.

“In hindsight, we took on too much in terms of initiatives and infrastructure,” he said.

The company reported net earnings were up 31.4 percent for its second quarter, to $42.3 million from $32.2 million last year.

Second quarter sales rose 16 percent, to $1.17 billion from $1 billion a year ago; while comps increased 7 percent.

Earnings results for the second quarter included a non-cash after-tax charge of $11 million related to the write-down of the company's former corporate headquarters and distribution center in Newark, Calif.