Good morning, and welcome to the Ross Stores Second Quarter 2012 Earnings Release Conference Call. The call will begin with prepared comments by management followed by a question-and-answer session. [Operator Instructions] 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 risks and uncertainties that could cause actual results to differ materially from historical performance or current expectations. Risk factors are included in today's press release and the company's fiscal 2011 Form 10-K and fiscal 2012 Form 10-Q and 8-Ks on file with the SEC. Now I'd like to turn the call over to Michael Balmuth, Vice Chairman and Chief Executive Officer.

Good morning. Joining me on our call today are Norman Ferber, Chairman of the Board; Michael O'Sullivan, President and Chief Operating Officer; Gary Cribb, Executive Vice President, Stores and Loss Prevention; John Call, Group Senior Vice President and Chief Financial Officer; and Bobbi Chaville, Senior Director, Investor Relations. Before we review our financial results, I'd like to briefly discuss our recent announcement of an updated CEO succession plan approved by our Board of Directors. As part of this plan and at my request, the board and I have reached an agreement where I will remain with the company at least through May of 2016. My CEO role will be unchanged until June of 2014. I will then become Executive Chairman, and the board will elect the new CEO from our strong bench of very talented and skilled senior executives. The new CEO will report directly to the board and take on responsibility for most areas of the company. As the Executive Chairman, I will remain actively involved in the business, with property development and dd's DISCOUNTS continuing to report to me. Our Chairman, Norman Ferber, will become Chairman Emeritus with his current consulting role to remain unchanged. The board and I firmly believe this type of long-term succession plan will allow us to remain focused on executing the strategies that have driven our outstanding financial results over the past several years. We are also confident this plan will help us continue to maximize future stockholder returns. In a couple of years, I will partner with the new CEO to effect a smooth leadership transition. I was able to benefit from this type of mentoring relationship with Norman Ferber, who handed the CEO reins to me 16 years ago. To ensure our ongoing success over the long term, I will continue to stay very engaged with the entire senior management team in setting strategy and direction for the company. I have been privileged to work with outstanding people at Ross Stores for 23 years and look forward to continuing to do so for many years to come. Now turning to earnings. We'll begin with a brief review of our second quarter performance, followed by our outlook for the remainder of the year. Afterwards, we'll be happy to respond to any questions you may have. We are pleased with our better-than-expected performance in the second quarter and first 6 months of 2012. Our strong sales and earnings growth for both periods continues to be driven by our ability to deliver compelling name-brand bargains to today's value-focused consumers, while strictly controlling both inventories and expenses. Earnings per share for the 13 weeks ended July 28, 2012, increased 27% to $0.81 from $0.64. These results are on top of a 20% gain in the same period last year. Net earnings for the quarter grew 23% to $182 million. Sales rose 12% to $2,341,000,000, with comparable store sales up 7% on top of 5% growth in the second quarter of 2011. For the 6 months ended July 28, 2012, earnings per share were $1.74, up from $1.38. These results represent a 26% increase on top of a 23% gain in the first half of 2011. Net earnings for the period rose 22% to $390.6 million, up from $321.2 million last year. Sales for the first 6 months of 2012 increased 13% to $4,698,000,000, with comparable store sales up 8%, which was on top of a 4% gain in the prior year period. Merchandise and geographic trends were broad based for the second quarter and the first 6 months. For both periods, Juniors and Shoes were the best-performing categories, while Florida showed the most geographic strength. Earnings before interest and taxes in the 2012 second quarter grew to a record 12.8% of sales, up from 11.7% in the prior year. The drivers were higher gross margin and leverage on selling, general and administrative expenses from the strong gain in same-store sales. John will provide additional color on these operating margin trends in a few minutes. As we ended the second quarter, total consolidated inventories increased 2% versus the prior year, while packaway levels were 48% of total inventories compared to 49% at this time last year. More importantly, average in-store inventories declined 5%. As a reminder, we are planning selling store inventories to be down in the mid-single-digit range for the back half of the year. Now let's turn to dd's DISCOUNTS. dd's generated solid results in the second quarter with above planned sales and gross margin. Like Ross, dd's is also benefiting from our ability to flow a larger percentage of fresh product to our stores by operating on lower inventory levels. We continue to expect dd's to generate improved growth in pre-tax earnings for 2012 compared to last year. With respect to Ross Stores' expansion program, we remain on track to open a total of 31 new Ross and dd's DISCOUNTS locations in the third quarter and about 80 stores for the full year. This growth includes our ongoing expansion into the Midwest, where we expect to operate 36 Ross stores by the end of the year. Now John will provide further color on our second quarter results and details on our guidance for the balance of the year.

Thank you, Michael. Our 7% comparable store sales gain in the second quarter was driven by mid-single-digit growth in the number of transactions, combined with a low single-digit increase in the size of the average basket. Operating margin grew by about 110 basis points in the quarter to 12.8%. The 80-basis point improvement in gross margin was driven by a 65-basis point increase in merchandise margin, which includes 10 basis points from a lower shrink accrual and lower distribution and occupancy costs, which contributed about 50 and 25 basis points, respectively. These favorable trends more than offset 55 basis points of higher buying costs due in part to one-time severance-related expenses and modestly higher freight costs. Leverage on the robust 7% comparable store sales gain drove a 30-basis point reduction in selling, general and administrative expenses, primarily due to a lower store cost as a percent of sales. During the second quarter, we repurchased 1.7 million shares for a total purchase price of $113 million. We remain on track to buy back a total of $450 million in common stock during fiscal 2012 to complete the 2-year $900 million program authorized in early 2011. Let's turn now to our guidance for the back half of the year. For the 13 weeks ending October 27, 2012, we are targeting total sales to grow about 8% to 9%, driven by a combination of new store growth and same-store sales that are forecast to be up 3% to 4%. Comparable store sales are forecast to increase 4% to 5% in August, 2% to 3% in September and 3% to 4% in October. This compares to last year when they rose 4% in August and 5% in both September and October. As Michael mentioned, we plan to open 31 net new stores during the period, including 25 Ross Dress for Less and 6 dd's DISCOUNTS. Third quarter earnings per share are forecast to be in the range of $0.63 to $0.66 compared to $0.63 in the prior year. Last year's third quarter benefited from much better-than-expected shortage results and a lower tax rate due to favorable tax audit settlements. Together, these items increased third quarter 2011 EPS by about $0.06 per share. We are targeting operating margin of 10.4% to 10.6% for the 2012 third quarter. As I just mentioned, higher projected shortage this year compared to do very favorable prior year shrink results is expected to more than offset significant leverage on selling, general and administrative expenses and improvement in merchandise gross margins in this year's third quarter. Net interest expense is planned to be approximately $2 million, and our tax rate is expected to be about 37%, up from 35% in the prior year period. We also estimate weighted-average diluted shares outstanding of about $223 million. For the fourth quarter, we are targeting same-store sales for the 13 weeks ending January 26, 2013, to increase 1% to 2% on top of strong 7% gain last year. For the 14 weeks ending February 2, 2013, we are targeting earnings per share to be in the range of $0.99 to $1.04, up from last year's $0.85. Without the estimated per-share benefit of about $0.89 from the 53rd week, fourth quarter EPS is projected to grow about 6% to 12%. Now I'll turn the call back to Michael.

Thank you, John. As noted in today's press release, we are raising our 2012 guidance with earnings per share for the 53 weeks ending February 2, 2013, now forecast to be in the range of $3.36 to $3.44, including the previously mentioned $0.08 to $0.09 benefit from the extra week. This compares to our prior guidance of $3.26 to $3.37 and represents projected earnings per share growth of 14% to 17% on a 52-week basis over earnings per share of $2.86 in fiscal 2011. Looking ahead, we recognize that there are still a number of headwinds in today's macroeconomic and retail environment that could have a negative impact on consumer spending. As a result, while we hope to do better, we believe it is prudent to plan our business conservatively. That said, we remain very liquid in our open-to-buy, and our merchants continue to find plenty of competitively priced, name-brand fashions for the family and the home. In addition, we are very well positioned as a value retailer in the current climate. By efficiently executing our authorized business model, we believe we can continue to benefit from consumers' ongoing preference for bargains. To accomplish that, we plan to stay focused on the same strategy that have driven our successful growth over the past several years, namely offering our customers fresh and exciting assortments of compelling name-brand merchandise, while strictly controlling both inventories and expenses. At this point, we would like to open up the call and respond to any questions you may have.

[Operator Instructions] And your first question comes from the line of Brian Tunick with JPMorgan.

I guess first question, just trying to understand a little more as we think about, last quarter, you raised your overall store target plans. And just maybe any learning so far from the Midwest and the Chicago market, whether it be the micro-merchandising or how you're flowing inventory into the stores, that can give you more confidence about sort of either accelerating or holding your square-footage growth rate here going forward. And then the second question, on the shrink, I know it comes up on a lot of the calls, but besides having obviously lower inventory per foot, are there other things you guys have done in the past 3 or 4 years in the stores on the employee side where you think that can continue to improve the shrink rate?

Okay. Brian, on the first piece of that, the new markets. We -- as you know, we opened 14 stores in new markets in October of last year. So still very, very early to get any kind of read. But what I would say is that the early signs have been very positive. Customer reception and the customer feedback we've gotten have been very good. And that kind of reinforced our belief that we're going to be very successful in those markets long term. Any major learnings? I think that's the question you already asked. Nothing major. I think we've made some tweaks along the way, some minor improvements here and there, to assortments and to operations but nothing major. So overall, we feel very good about the new markets.

And this is Gary, I'll answer the question around shrink. So we, over the past number of years, have implemented a significant number of shortage initiatives. To name a few, we have increased our physical personnel in stores designed to prevent shortage. We've got a number of technology advances that we use. We've implemented hard tagging throughout store, again, designed at shortage prevention. And we believe that through consistent execution that we can get better over time.

Your next question comes from the line of Rick Patel with Bank of America.

It looks like you had a pretty decent ramp-up in packaway inventories on a dollar basis from 1Q to 2Q. And can you just help us think about that? Is it a function of ramping up for the holidays? Or have you seen an uptick in a number of great buying opportunity in the marketplace? And then secondly, how should we think about packaway inventories ramping in the back half? And what are the gross margin implications of that? Michael O'Sullivan: Yes. Rick, it's a function of a sliding, what we consider, terrific bargains -- branded bargains, okay? And thinking about our packaway levels going forward, it's going to be a function of what we find, okay? If it continues to be a very good buyers market, it would ramp. But that remains to be seen. So far, we've been seeing some very good buying. Buying opportunities out there are very good. And the gross margin on it, the gross margin on it is favorable. But you match up gross margin to the parent business that it comes from. So better product has obviously lower margin than moderate products. But the packaway product of each is higher than if we were buying goods regularly on close-ups.

Okay. And then can you update us on your marketing strategy for the back half? I'm curious if you're planning marketing dollars to be up versus last year and how much of a change you're expecting in impressions given the different channels that you're using for marketing this year. Michael O'Sullivan: Yes. Rick, there's pretty no change in our marketing strategy in the back half. Our marketing spending will be in line with last year as a percentage of sales. And our marketing mix in terms of TVs and other channels will be comparable to last year.

Your next question comes from the line of Jamie Katz with MorningStar.

Are there any new ways that you guys have thought of increasing traffic maybe through some sort of targeted marketing in certain regions? Obviously, you called out Florida as a strong region. But are there some regions maybe that are coming in a little bit weaker that you guys have changed the way you've targeted the audience there? Michael O'Sullivan: Let me take that question in 2 parts. First of all, in terms of the regions, our sales performance have been pretty broad based. I know Michael mentioned in his remarks that Florida has been the strongest. But actually, we've been strong across all regions. SO there haven't been any weak regions in our chain. In terms of any special targeting, any special marketing, no really. I mean, our style in our strategy has always been to use marketing as a way to remind the customer to keep coming to Ross. So the real perk is the bargain that they find in the store. So our focus is really to make sure that we have great merchandise, great bargains, and that's what keeps the customer coming back. Marketing is just to remind them of that. We're not trying any gimmicks with our marketing program. We're not doing anything different.

Your next question comes from the line of Jeff Stein with Northcoast Research.

A couple of questions. First off, question for John. Hammering at the high end of your guidance range for the third quarter, in other words, if you do a 4% comp, would you leverage SG&A at that level?

Yes, we would.

Okay, great. And then next question, wondering your home business seems to have lagged the apparel business for some time, and I'm wondering if there is any strategy in mind to kind of maybe reenergize that business and try to ramp up the growth rate a little bit more?

Well, we think at home, in the more recent period, we've had some execution issues, and we think we're in the process of cleaning all that up. And we would expect home to be back on track based on that.

Okay. And what if -- should we expect to see that in the back half of this year? Or is that more of a calendar 2013 initiative?

I think -- oh, no. It's an initiative that's ongoing. It's -- you'd expect -- we'd expect to see some improvement in Q4 and more so as we move into the spring.

Okay. And just finally, CapEx. Can you talk at all about spending levels beyond the current fiscal year? Should they begin to abate somewhat? Or will they remain at these levels?

So as far as CapEx goes this year, we've updated our view around that. We think we'll spend between $465 million and $475 million. Principally, the increases there are related to distribution centers that we're building. That will continue into 2013. And then after that, it will abate back to more historical level.

Your next question comes from the line of Kimberly Greenberger from Morgan Stanley.

I wanted to ask about the second quarter transaction metrics. John, if you could break those down for us between the transaction count versus average dollar sale and averaging at retail price. As I recall, it's primarily been an increase in traffic and an increase in transaction sort of driven your comp, so far, this year. And I'm wondering if you have any insight into the drivers of that surge in traffic. I -- as I think about your business over the last 10 or 12 years, I don't remember a year where I think traffic has been as robust as this year. So maybe just any insight you could offer there. And secondarily, if you have a similarly low shrink results this year, when you do your physical inventory in September as you did last year, would that be neutral to third quarter EPS? Or maybe what's embedded in your third quarter guidance?

Sure. As far as the transaction trends in the second quarter, the number of transactions as we mentioned was up mid-single-digit rates, so the driver of the comp was the transaction volume. We did see a little single-digit increase in the size of the average basket. But as of seen over the last several years, it's been traffic that has really driven the comp. And last year, we had a similar levels of kind of mid-single-digit increase in traffic, and that's been a recurring thing. As far as shrink is concerned -- so we have no doubt any benefit into positive shrink results above and beyond our approval this year. I'll remind you that over the past probably 2 or 3 years, the results have benefited the third quarter by probably $0.04 to $0.055 over a 3-year period. We don't think it's prudent to expect that again and continue to expect that because we're at historically low levels, and we think it's just prudent not to dial that in. And I don't think it's realistic that we'll receive the 4% to 5% benefit. Having said that, as Gary mentioned, we're still very bullish on our shrink work. We continue to invest on those initiatives, but we're down to a level of where we have already picked the high-hanging fruit.

Your next question comes from the line of David Mann with Johnson Rice.

John, can you talk a little bit about the components of gross margin, how we should think about those in the third quarter? And then also, can you just give us a sense on how big that one-time severance expense was?

Yes. So in the third quarter, the thing will continue for the year, which is the lower inventory levels have increased turn, which have reduced our markdown levels. And that should continue into the third and the fourth quarters, as we anticipate inventories will be down in the mid-singles. And as far as the kind of one-time severance piece, it was worth about 20 bps.

Okay. And then on, in terms of the distribution number, the benefit that you have in the current quarter, the second quarter, can you just talk a little bit about what was going on there?

Sure. We had -- we did have at a kind of a gross level the distribution centers did perform better on higher volumes, so we did have some leverage there. There's also a piece of packaway timing embedded in that 50 basis points of improvement in distribution.

Okay. And one last question, in terms of dd's, you guys are delivering, it sounds like much improved performance or continued improved performance there. Can you give us a sense on, in terms of your guidance, what kind of improved bottom line performance dd's is likely to contribute this year? Michael O'Sullivan: Well, overall, David, you're right. dd's continued to perform well for the second quarter. And actually for the first half of the year, it beat itself in margins plans. And over the last few years, it's benefited from the same approach that we've taken at Ross in terms of reducing our inventory levels, which has improved the freshness of the product, which has driven sales and has also sped up terms, which have improved the margins. So we're pretty happy with the -- with dd's performance. I think we've mentioned, earlier in the year, we expect that dd's should be accretive to earnings, not really material. I mean, it's still a relatively small part of our overall business, but it's on track to be pretty accretive to earnings this year.

Yes. The only thing I'll add to that is that we are pleased with the dd's store contribution levels, which pretty much mimicked those at Ross Stores [indiscernible].

Your next question comes from the line of Richard Jaffe from Stifel, Nicolaus.

Just a follow-on with dd's, how much of your Ross Stores' expertise in the market is helping dd's? How much does one team sort of provide a helping hand to the other in terms of great product or packaway or excess product? Or are they run as really silos, very, very independent?

They're separate buying organizations that work closely together when it's appropriate.

Your next question comes from the line of Laura Champine from Canaccord.

This is Jason Smith on the line for Laura. I just had a quick question about your Q3 guidance. Is there something that you're seeing in August that's making you a little more conservative, given recent traffic and sales trends?

So for August, we're guiding 4 to 5, which we're guiding that the highest month of the quarter. It's up against a lower comp. Other than that, I think I'll remain silent on it in that we don't comment on in a month so.

Okay. And -- I mean, where is the conservatism coming, given recent trends?

We hope to do better, okay? And we think it's better to run our business in a very conservative model. And it's worked well for us, doing that for a number of years. And we'll continue to do that.

Your next question comes from the line of Omar Saad from ISI group.

I was wondering if you could give us a little bit of an update on the buying organization. What size you're at, at this point? And have you seen a lot of growth there? Are you being -- is that -- what's the talent availability like as the business continues to grow? Are you seeing turnover kind of where -- what are your long-term goals? Or you -- or do you kind of feel you have the organization in place on the buying side for what you're looking for, for the business long-term? Michael O'Sullivan: Okay. I would say we had a very well-developed buying organization that we grow close to 10% a year. We -- that's our plan -- our medium-range plan. We have a very aggressive program developing our own. And certainly, the talent availability outside of our company, to your question, with what's going on in the retail industry over the last few years, there's some potential talent out there, too. But we prefer to grow our own when we can.

Got you. And then, if I could ask a -- just a quick question on kind of like the landscape, the competitive dynamics out there, some dislocation happening at various departments stores. Do you see changes in the way consumers are shopping? And can you see in your data new customers coming into your stores, whether it's the Ross Stores or the dd's stores that are kind of fleeing some of these other channels?

Yes. We -- I guess a couple of full-term response to that, Omar. First of all, with an 8% comp store sales growth in the first half of the year, it's clear that we're growing customers from somewhere. We -- next, that's been true for the last few years. Our comp sales has been very strong, so we're taking share of the apparel market. We do a lot of research where our customers are coming from, and we've gained a lot of new customers over the last few years. And what the research tells us is that there are number of factors, and there are a number of places that our customers come from. So partly, it's dislocation into the spot department store channel but also the general economy and perhaps, most importantly, the #1 thing of course is customers that comes to Ross and do business with us is that we're offering them great deals. So it's a combination of all those factors. But the most important one is that we're offering them a bargain.

Your next question comes from the line of Evren Kopelman with Wells Fargo.

I wanted to ask about your micro-merchandising initiatives, kind of maybe where we are in terms of the benefits you expect to see from that and maybe some of the surprises that you have seen that, relative to your expectations, that the systems have allowed you to do. Michael O'Sullivan: So Evren,, we rolled out micro-merchandising perhaps 2 years ago. It is -- it has actually been several years in development, so we spent a lot of time thinking about it before we put it in place and designing it. But it's really been in place for about 2 years across the chain. And we think it's helped our business in terms of making sure that we have the right product going to the right stores at the right time. And it's been a major contributor to us being able to continue to cut our inventory levels, which in turn has improved freshness of the merchandise and help to drive turns. In terms of big surprises, I don't think there's been any. I think it's kind of done what we expect it to. Each store now has a much more customize assortment based upon the micro-merchandising planning and trending that we've done but the best kind of what we intend it to do. So no big surprises to report.

Your next question comes from the line of Pamela Quintiliano from Oppenheimer.

It's Dan Jacome filling in for Pamela. Just had a quick question on Ross versus dd's. Can you help us think about the traffic and conversion levels at those 2, given that they reflect different demographics? And earlier this week, a competitor, caters to a more constrained consumer, had suggested that the macro is, well, beginning to weigh more heavily. So just any insights would be greatly appreciated.

Dan, in terms of the composition of comps among both companies, very similar traffics driving both of those increases, and we haven't seen a large disparity among the 2. Michael O'Sullivan: And around conversion, both Ross and dd's have pretty help the conversion rates. Typically, what we find is when a customer visits a Ross store or when a customer visits a dd's, more often than not, they are going to find something that they like. So the conversion rates are pretty high at both chains.

Your next question comes from the line of Roxanne Meyer from UBS.

First, I just wanted to follow up on your comments regarding new customers and where you're getting them from. Wondering if you could share anecdotally any insights as to, are you seeing a wider customer demographic? I know one of your competitors talked about seeing a younger customer increasingly shopping their stores. And then secondly, given that so many retailers are talking about lower sourcing costs trickling through in the back half, wondering if you have any update as to what that impact could be on your business as well. Michael O'Sullivan: So Ross, handling the customer question. Yes. We've certainly done research on the new customers that we've attracted. And by and large, the demog -- they're growing from the same demographic groups as our existing customer base. You've mentioned younger customers. We've always done particularly well with younger customers. I think that's a combination of they're attracted to the great values that we offer and the assortment that we offer. And we see that -- again, in our research on new customers, we see that continuing that we do particularly well with younger customers.

Relative to cost and impact on our business, we price our merchandise off of branded product that's in department stores. So we watch how they -- we'll be watching how they price their product and we have been watching. And we'll be pricing accordingly to keep a proper distance from their retails -- our retails. And the cost for us is really a function of the existing supply lines in the market, okay, regardless of what they're paying for product.

Your next question comes from the line of Alex Fuhrman with Piper Jaffray.

I would like to talk a little bit about the composition of your packaway inventory, given that it's been -- it's been building based on opportunistic buys, and I would assume the quality is very high. If you could comment on the quality of the brands in your packaway inventory, how you feel that sits versus last year. And then, given the strength you've had in the Juniors business the last 11 months, and I know it's a little bit harder to pack that merchandise away because it's a little bit more of a fickle customer in terms of fashion. Has the composition of your packaway inventory by merchandise category changed at all as Juniors has become a more prominent part of the business?

We actually feel very good about the quality of brands in our packaway, and that's the reason why the number has been climbing. Our Junior business is not a big participant in the packaway business. It's a much more trendy business and it happens. There's really one classification, in particular, where we might pack away a little more. But for the most part, in Juniors, it's a buy-and-sell business.

Your next question comes from the line of Daniel Hofkin with William Blair & Co.

Just following up on the earlier question on the department stores, specifically, J.C. Penney, can you say qualitatively in trade areas versus non-trade areas of J.C. Penney, are you seeing a measurable difference in the comp over the last -- since earlier this year? And then, is that also helping you on the dislocation among some of your department store competitors helping you in terms of incremental product availability? Michael O'Sullivan: In terms of the sales impact, Daniel, 95% of our stores are within 10 miles of a J.C. Penney. And we've sliced and diced stores based upon proximity. And we don't see a pattern. So analytically, what I can tell you is, we don't see that stores near J.C. Penneys are comping better than stores that are farther away. All the stores, whether they're near or far from J.C. Penney, are doing well. With that said, I'll go back to the point we talked about earlier. With an 8% comp in the first half, it's clear that we're taking share from somewhere, and customers are coming from somewhere. But I think our conclusion is that they're coming from a lot of different places. This is only one factor. There are many other factors driving our comp performance.

And in terms of seeing product as it relates to specifically one retailer, I would say the mid-tiers has struggled a little more in total. And although we don't often know exactly where the product is coming from as then to sell it to us, our suspicion is that we're getting products from a few of the key mid-tier players.

Okay. If I could ask -- I'm sorry, I was just going to say if I could ask one follow-up which is, what sort of the current thought about that drop-through rate on an incremental comp point? I know you guys budget your business for a low comp.

Yes. So our drop-through rates around 25% for incremental sales above plan, and that's about what we're running.

It's above -- that's above the operating margin on the incremental sales.

It's about the operating margin. That's -- on an annual basis, 1-point comp was probably worth about $0.06 to $0.07.

Your next question comes from the line of Mark Montagna from Avondale Partners.

Just wanted to get a little bit more clarity in terms of customers from major prior question on this. Are you seeing a broadening of your age range by any chance? And are you seeing a broadening of the income demographic, perhaps a higher income demographic? Michael O'Sullivan: Well, we -- our customers are pretty -- have a pretty broad set of demographics to begin with. We -- our existing customers are drawn from different income groups, different age groups, entities and so forth. And so, no, we haven't seen any major change in that -- in that profile, in that demographic breakup.

Okay. And then just lastly, just regarding inventory shrink. It sounds like you're guiding to flat. Wouldn't it be logical that if your inventories may be down mid-single digits, we should expect some less shrink to some [indiscernible] less inventory out there?

Is the question we should extract lower shrink levels because we have lower inventories?

Yes. Because clearly, you're executing well on a lot of the other disciplines to prevent shrink, just is it logical there's that much less to be?

I'd say we hope so. We're optimistic about that. It's not only lower levels of inventory but the programs that we put in place, and we keep investing in that area of the business.

Your next question comes from the line of David Glick with Buckingham Research.

Just 2 quick questions. First, on the SG&A leverage in the second quarter, clearly a very strong operating margin performance. So I was just curious why the leverage wasn't as great as previous quarters. I'm assuming perhaps that it was a higher incentive comp accrual or maybe a catch-up accrual, and I was wondering if you could give some color on that. And then I have a follow-up on your expansion strategy for Ross.

Sure, David. I think that's right. There's always timing issues between quarters. We did have some pretty good leverage in G&A. But we did take our bonus accrual up in the quarter as well. So I'd say good leverage. There's some timing issues in there. But overall, we're pretty pleased with the result.

Okay, that's helpful. And then in terms of your expansion strategy for the Ross Stores, you opened in Chicago 1 year ago. How do we think about how you fill in the white space as you move across pretty vast area where you don't have stores? Is your strategy to be expanding into more contiguous markets? Or could you kind of leapfrog around to various parts of that white space? Michael O'Sullivan: We -- that's something we look at all the time in terms of [indiscernible] availability and new markets to move into. Right now, our focus is on the new markets we've moved into, such as Chicago and building our scale in those markets. I'd rather not comment in terms of the next markets that we would go to after that.

Your next question comes from the line of Marni Shapiro with The Retail Tracker.

Two very quick questions. On dd's, as you open stores, should we expect to see a similar growth regionally as the way you rolled out Ross Stores still with the cluster approach and across the Southern tier before you would hit someplace like the Midwest? Michael O'Sullivan: Yes. Well, I can't -- a couple of things. One thing for sure is that the approach that we took at Ross, historically, was a very targeted approach, where we pick one market and we move to another market and we move to another market, rather than sort of a shotgun, sort of scattergun kind of approach. We've always tried to be much more focused to build scale in the markets that we're in before we move on. And I think you can certainly expect the same thing in terms of dd's.

Excellent. And then following on the heels of the last question, is there any thought over a longer period of time of moving into either Canada or secondary or not-obvious markets, like maybe outlet malls? Michael O'Sullivan: On your first question about other country that's nationally, no, not right now. Our priority right now is to make good news within the United States. We're only in just around about 30 states. So until we've expanded into a greater number of states within the U.S., I don't think we're really going to look internationally.

And relative to outlet malls, I don't have the number with me, but we are in several outlet malls.

Your next question comes from the line of Dana Telsey with Telsey Advisory Group.

As you think about new markets, how do you see the performance in new markets? Anything being done differently in terms of size of store, timeframe to return, logistics in getting those stores accepted in a quicker manner? And lastly, with the strength of the comp that you've been having lately, any way to track how much of the business of the traffic is from new customers, how much is from existing customers? Michael O'Sullivan: Dana, on the first thing, markets. We've put a lot of work into preparing for our entry into new markets, and we certainly went back and looked at what we've learned from previous new markets that we entered. And I think there are a number of things that we were able to incorporate into our entry into the Chicago market last year. Those things included just how we factored out setting up an operating team, how we think about marketing. Obviously, we've talked a lot in the past about micro-merchandising and making sure we have better tools to come up with the right assortments as we enter new markets. So I think there are whole host of things that went into preparing for the new market entry. On the second part of your question, new customers versus existing customers. We know that -- from our own research, we do know that our comp growth has been driven by a combination of new customers and existing customers spending more or coming to the store more often. So it's really a combination of both of those.

[Operator Instructions] And your next question comes from the line of Paul Lejuez from Nomura.

I was just wondering about the packaway strategy at dd's. How does that compare to Ross Stores? Is it a larger or smaller percentage of the total inventory at any given time?

It's smaller.

I'm showing there are no further questions on the line. I'll turn the call back to Mr. Balmuth.

Thank you for joining us today and for your interest in Ross Stores. Have a great day.

And ladies and gentlemen, this concludes today's conference call. You may now disconnect.