Ross Stores Confident But Cautious

Don Hogsett, Staff Staff, August 21, 2006

Pleasanton, Calif. — With sales coming in at the high end of expectations, and same-store sales growing by 4.0%, Ross Stores Inc. recorded a second-quarter profit of $45.4 million, up 7.3% from the same period last year.

Overall sales at the West Coast off-pricer improved by 11.6%, to $1.3 billion from $1.2 billion, helped by rising comps and the rollout of new units.

In a lift to the bottom line, average gross margin widened by 110 basis points, or 1.1 percentage points, to 21.7% from 21.6% a year ago. But acting as a modest drag and offsetting some of the margin increase, operating costs climbed higher by 40 basis points, or four-tenths of a percentage point, to 16.1% of sales from 15.7% last year.

Michael Balmuth, ceo, said, “Improvements in distribution costs and merchandise margin were offset by higher shrinkage accruals, freight, store and occupancy expenses.”

Ross, like an increasing number of retailers, is hoarding cash and shunning debt, providing a further boost to profits, and during the second quarter the retailer earned $1.6 million in interest income, up from $580,000 last year.

Looking ahead with prudence, Balmuth said same-store sales were beneath plan for the first two weeks of August, rising by 2%. Hoisting a yellow caution flag, he warned investors, “In addition, we are entering the fall season with residual inventory and clearance levels that are expected to pressure gross margin during the third quarter. As a result, we are adopting a more conservative outlook for the second half of the year.”

Ross Stores Inc.

Qtr. 7/29 (x000) 2006 2005 % change
a. Second quarter results include $1.6 million in interest income, compared with $580,000 during the same period last year.
b. Six-month results include $3.4 million in interest income vs. $878,000 a year ago.
Sales $1,308,052 $1,171,862 11.6
Oper. income (EBIT) 73,287 69,044 6.1
Net income 45,377a 42,279a 7.3
Per share (diluted) 0.32 0.29 10.3
Average gross margin 21.7% 21.6%
SG&A expenses 16.1% 15.7%
Six months
Sales 2,599,728 2,295,799 13.2
Oper. income (EBIT) 168,960 150,929 11.9
Net income 104,594b 92,329b 13.3
Per share (diluted) 0.73 0.62 17.7
Average gross margin 22.6% 22.3%
SG&A expenses 16.1% 15.7%

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