Good morning, and welcome to the Ross Stores Third Quarter 2012 Earnings Release Conference call. The call would 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-Qs and 8-Ks on file with the SEC. And 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 Michael Hartshorn, Senior Vice President and Deputy Chief Financial Officer. We will begin with a review of our third quarter performance followed by our outlook for the upcoming holiday season, after which we'll be happy to respond to any questions you may have. We are pleased with the strong sales and earnings gains we generated in the third quarter and first 9 months of 2012. Our better-than-expected results year-to-date were driven by our ongoing ability to offer shoppers a fresh and exciting array of compelling name-brand bargains for the family and the home. In addition, operating of stores on lower inventories while strictly controlling expenses continues to enhance profit margins. Earnings per share for the 13 weeks ended October 27, 2012, increased 14% to $0.72, up from $0.63. These results are on top of a 24% gain in last year's third quarter. Net earnings for the quarter grew 11% to $159.5 million. Sales rose 11% to $2,263,000,000 with comparable store sales up 6% following 5% growth in the third quarter of 2011. For the 9 months ended October 27, 2012, earnings per share were $2.46, up from $2.01. These results represent a 22% increase versus a 24% gain last year. Net earnings for the period rose 18% to $550.2 million, up from $465.2 million for the first 9 months of 2011. Sales for the first 9 months of 2012 increased 12% to $6,960,000,000 with comparable store sales up 7% on top of a 5% gain for the same period last year. Merchandising geographic trends were broad-based for the third quarter. Juniors was the best-performing category, while the Southwest Texas and Florida showed the most geographic strength. Earnings before interest and taxes in the 2012 third quarter grew to a record 11.3% of sales, up from 10.9% last year. As a percent of sales, higher merchandise margin, lower distribution cost and leverage on occupancy and general, selling and administrative expenses were partially offset by a lower shortage benefit in the prior year and increases in freight and buying costs. John will provide additional color on these operating margin trends in a few minutes. As we ended the third quarter, total consolidated inventories were up 9% over last year, while packaway levels were 46% of total inventories compared to 43% at this time in 2011. More importantly, average in-store inventories were down 6% at the end of the quarter, and we continue to target selling store inventories to decline in the mid-single-digit range for the fourth quarter. Now let's turn to dd's DISCOUNTS. dd's continued to generate solid results in the third quarter with better-than-expected sales and profitability. Like Ross, dd's is benefiting from our ability to offer a wide assortment of terrific bargains while also operating the business on reduced inventory levels. We continue to expect dd's to generate improved growth in pretax earnings for 2012 compared to last year. We also recently completed our store expansion program for the year, adding 31 new Ross and dd’s DISCOUNTS locations combined in the third quarter for a total of 80 new stores in 2012 as planned. Now John will provide further color on our third quarter results and details on our guidance for the fourth quarter.

Thank you, Michael. Our 6% comparable store sales gain in the third 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 35 basis points in the quarter to 11.3% as 40 basis points of leverage on selling, general and administrative cost was partially offset by a 5-basis-point increase in the cost of goods sold compared to the prior year. The slight increase in cost of goods sold consisted of 30 basis points of higher merchandise margin, 15 basis points of leverage on occupancy costs and distribution expenses that declined approximately 45 basis points. The latter was mainly due to favorable timing of packaway-related processing costs. These improvements were offset by 45 basis points from a lower shortage benefit than the prior year and buying and freight expenses that increased 25 basis points each. Shortage results from this year's annual physical inventory were better than expected, adding about $0.02 in earnings per share. However, the favorable variance versus our reserves was larger in the third quarter of 2011, when we realized a $0.04 benefit. In addition, last year's third quarter was aided by a lower tax rate due to favorable tax audit settlements that added approximately $0.02 to earnings per share. Our repurchase program also remains on track as we bought back 1.7 million shares in the quarter for a total purchase price of $111 million. As a result, year-to-date, we have repurchased 5.4 million shares for a total price of $334 million. We expect to buy $116 million in common stock during the fourth quarter, which will complete the 2-year $900 million program announced in early 2011. Let's turn now to our guidance for the fourth quarter. As noted in today's press release, we continue to forecast earnings per share of $0.99 to $1.04 for the 14 weeks ending February 2, 2013. This compares to $0.85 for the 13 weeks ended January 28, 2012. The benefit to EPS from the 53rd week in 2012 is estimated to be about $0.08 to $0.09 and is included in this guidance range. Operating statement assumptions for the quarter include the following: we are targeting total sales to grow about 12% to 13%, driven by a combination of new store growth; same-store sales that are forecast to be up 1% to 2% and the benefit from this year's 53rd week. As a reminder, we have a challenging comparison as same-store sales were up a robust 7% in last year's fourth quarter. Comparable store sales are planned to be flat to up 1% in November, up 2% to 3% in December and up 1% to 2% in January. December is expected to be the strongest month of the quarter as it has 2 extra shopping days before Christmas compared to 2011. Same-store sales increased 5%, 9% and 5%, respectively, in November, December and January of last year. We are targeting fourth quarter operating margin of 13.2% to 13.5%. Net interest expense is planned to be approximately $1 million, and our tax rate is expected to be about 38%. We also estimate weighted average diluted shares outstanding of about 221 million. Now I'll turn the call back to Michael.

Thank you, John. As previously noted, we are pleased with our strong performance for the first 9 months of 2012. Our financial results reflect that we continue to benefit from our ability to efficiently execute our off-price strategies, making our stores attractive destinations for today's value-conscious customers. As we enter the important fourth quarter, our merchants are doing a terrific job of delivering plenty of bargain-priced gifts and fashions for the family and the home. That said, during the holiday season, it is always difficult to predict how commercial and other retailers may become or how current macroeconomic and political uncertainties may impact consumer spending. In addition, as John noted, same-store sales increased a robust 7% in the fourth quarter of 2011 for our most challenging comparison of the year. So while we hope to do better, we believe it is prudent to maintain our prior fourth quarter forecast for both sales and earnings. Based on our year-to-date results and fourth quarter guidance, earnings per share for the 53 weeks ending February 2, 2013, are now forecast to be $3.45 to $3.50, which includes the estimated earnings per share benefit of $0.08 to $0.09 from the extra week. On a 52-week basis, our guidance range for fiscal 2012 represents solid projected earnings per share growth of 17% to 19% on top of a 24% increase in fiscal 2011, when we reported earnings per share of $2.86. Looking ahead, our top priority continues to be maximizing our ability to offer shoppers the best bargains possible. Investing in our merchant organization has been and still is our most important initiative. And today, we have hundreds of merchants sourcing products from thousands of vendors. Our commitment to increasing these key resources should ensure that we will have ongoing access to an abundance of exciting name-brand products to drive our future growth. In closing, we continue to target average annual earnings per share growth of 10% to 15% over the longer term. We believe we can achieve this through a combination of store growth, same-store sales gains, sustainable operating margins and the benefit to earnings per share from our ongoing stock repurchase program. At this point, we'd like to open up the call and respond to any questions you might have.

[Operator Instructions] Your first question comes from the line of Rick Patel with Bank of America Merrill Lynch.

Can you talk about the impact of Hurricane Sandy on your business, in the Northeast and mid-Atlantic, perhaps quantify the impact it's having on your November comp? And then secondly, can you just talk about the impact of the hurricane on your sourcing opportunities? With a number of retailers having been impacted, are you seeing an abundance of buying opportunities in the marketplace? And if so, should we expect your packaway inventories to rise in the coming months? Michael O'Sullivan: Rick, it's Michael O'Sullivan. I'll answer that. In terms of impact on sales, we wouldn't expect it to be material and see much of the impact to the guidance we've just given for fourth quarter. In terms of sourcing, it's a little bit early to tell. Right now, we're pretty happy with the supply that we are seeing. We don't know whether Hurricane Sandy is contributing to that or not.

And then can you talk about your business in California? It seems like the last few months have been tough out there with some gas price volatility and then some unfavorable weather. Were the trends in that region significantly different in 3Q versus prior quarters? And what's your outlook for that region in the fourth quarter? Michael O'Sullivan: Actually, California has been performing pretty well here. We've been pretty happy with performance in the state. It's pretty close to the chain, just a little bit lower than the chain. So we're not too concerned. In terms of prospects over the next couple of quarters, we don't see a lot of issues that could change that trend.

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

My first question is for John. John, looking at the new-store productivity for the stores that you've opened here over the last year, the way we model it, it looks like new-store productivity relative to the existing base is a little lower this year, and I'm wondering if that's new markets or dd's, if you could comment on that. And then secondarily, the buying costs, I think, you indicated delevered about 25 basis points on a 6% comp. I'm wondering what the sort of -- at what comp level would you expect buying costs to be relatively neutral? And then, Michael, the inventory levels in store just continue to get leaner and leaner, and the stores are looking so very clean. I'm wondering if you could just comment on if you see further opportunities beyond the fourth quarter where you've already given guidance, so into 2013 and beyond to continue to take down those inventory levels?

Kimberly, this is John. In terms of new store productivity, the new stores this year are achieving what we had planned them to achieve at around 70% of average store volumes. So we're pretty pleased with that. Having said that, as we go into new markets and with both Ross and dd's, we do plan those levels slightly lower than if we're in market in some of those stores. So we're actually pretty pleased with how the new stores are coming on. And your second question was around where merchant buying costs might lever. As is our # 1 priority to obtain bargains for our customers, we continue to invest in the merchant group, and I think we'll continue to do that. So to say at what point in time it will ultimately lever, we think that we that it probably should grow with or probably slightly faster than sales growth, so we'll continue to make those investments.

And on inventory levels going forward, we haven't established all our levels for next year, but I would anticipate that we'd have further reductions, probably in the low-single-digit range.

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

Two questions. One is on the average basket size, you said it's up low single-digits. Can you talk about be drivers behind that? Is it a mix shift among categories maybe that are higher priced or any other drivers? And then secondly, can you talk about the differences in strength between regions and what you think is driving some of the strength in certain regions?

Evren, I'll answer your first question on the average basket. It's being driven by slightly higher AURs, which could be slightly a mix difference, and the number of units is fairly flat. Michael O'Sullivan: And then on your second question, Evren, about regions. Although we called out Florida and Texas in the Southwest, I would say that our performance has been fairly broad-based, and we're pretty happy with the performance across all regions.

Your next question comes from the line of Oliver Chen with Citigroup.

Regarding the fourth quarter and your outlook, what are the puts and takes we should think about with respect to the gross margin opportunity in terms of the occupancy versus merch margin? Also, could you just update us on the incremental opportunities further for your macro merchandising initiatives? And our final question is in relation to the resolution of the elections. Has that been a positive or negative in terms of what's been happening after that's over now?

Oliver, it relates to the fourth quarter. As we've mentioned, we're planning a 1 to 2 comp for that quarter. We would expect some deleverage from expenses in the quarter based on the 1 to 2 comp. And on a 52-week basis, that's what we'd expect, between 10 and 40 basis points of deleverage. If you include the 53rd week, then we'd actually expect some leverage. Michael O'Sullivan: And then on your second question about micro-merchandising. As you know, we've rolled out micro-merchandising across the chain about 2 years ago. And I think at that time, we explained that our micro-merchandising uses history to project the inventory levels in each store. So obviously, the more history we have, the more accurate micro-merchandising is. So we think there's still continued value we're going to get from micro-merchandising over the next few years. So we've gotten some benefit today, which is what helped us to improve our turns, but we think there's still a little bit more to come. I think your first question was about the election. Certainly, we've seen no impact in terms of the outcome of the election on our business at this point. And we didn't expect one, so yes.

As a follow-up on the deleverage regarding the gross margin, are there positive offsets? Are you expecting there to be a nice positive from greater full price selling on the inventory control?

So we would expect further market benefits. As we take inventories down, we expect faster turns, which would reduce our current [ph] levels. So yes, we would expect some leverage from the merchandise line.

Your next question comes from the line of Brian Tunick with JPMorgan.

A couple of questions. First, on the market share, any more thoughts as we move through most of the year, sort of how much you think market share may have come from J.C. Penney or sort of what you think you're seeing from new customers coming into the Ross Stores and how sustainable you think you'll be able to keep those new customers? Second question, Home has been lagging, and I was just curious as we move into the tougher comps and everyone's excited about the housing recovery, sort of what are you guys doing to reassort the housing and home-related product? And the third part, on the distribution side of it, I believe you have a new DC ramping up or open and how that could impact your distribution expense leverage for next year? Michael O'Sullivan: Brian, on the first question about market share. Obviously, with a 7% comp year to date, we believe we're gaining share from someone in the apparel market. And I think that's been true in the last several years. Our comps have generally outperformed the competitors. And obviously, we're watching closely what's been happening in the midtier. We've tried to ask -- to isolate the impact of the midtier and J.C. Penney on our comp. But mathematically, we haven't been able to really quantify the impact. But I think suffice it to say that we believe that with a 7% comp, we are gaining share, and the customers are pleased with the values that we're offering. Let me jump to your third question, and then I think Michael will come back on the question about Home. Your third question was about the distribution centers. We actually have a new distribution center that will -- scheduled to open in 2014. So in terms of DC costs, I wouldn't expect any deleverage in 2013.

I would add to that, Michael, that in 2013, we would have increased CapEx spending around the build of that new DC. But as Michael said, no P&L impact.

Relative to Home, on a short-term basis, we have business well positioned, we believe, for gift-giving for the holiday period. And as we look further out, the way we approach things, first we ramp up more organization and we have in Home to help fuel some of the categories as business opportunities are starting to present themselves in more small-furniture-type businesses that we believe in in Home that relate to housing industry.

Your next question comes from the line of Paul Lejuez from Nomura.

Just on the packaway levels, your assumption for packaway levels can impact how we think about the distribution line and its impact on the EBIT margin. So I'm just curious what is built in to your assumptions for fourth quarter as it relates to packaway? And then second, just bigger picture, you guys are always very methodical in terms of how you buy back stock. You have an authorization, it takes you 2 years to go through it. Would you ever consider being a little bit more opportunistic in the way that you treat buyback, when the shares are down to buy back more, or will you stick to the very predictable pace that you've done it in the past?

To packaway levels, Paul, this one's a little bit difficult to predict, but from a planning perspective, we look for packaway levels to be somewhat even with last year. Now having said that, again, we are opportunistic on that line, so don't necessarily hold us to that, but that's what we have built into the forecast for the fourth quarter. As it relates to the buyback, we do look at being opportunistic with the buyback when it matters. When we see fluctuations in our PE, dramatic fluctuations in our PE, we tend to be a little bit more aggressive. But our instinct is to remain pretty methodical, as you mentioned, about buying back stock. We don't tend to be market timers.

John, on the packaway, is that flat to last quarter or flat year-over-year? And then....

Flat year-over-year.

Okay. And then, so what's the assumption for whether that distribution line helps or hurts you in the fourth quarter?

So it helps us in the third quarter, would tend to -- it would help -- based on the projections, it would help us in the fourth quarter.

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

My question is about the competitive environment as we move into Q4, because I know you price at a discount to department store pricing. What is your perception of what's happening with inventory levels and with promotions early in the holiday season?

It seems fairly promotional, okay? We probably say that every year to -- at this time. But certainly, with what's going on in terms of hours for Thanksgiving, it certainly seems like people position themselves pretty aggressively in promotions. Inventory levels, there's one store in the midtier that has certainly has stated that their inventory levels are much higher. The inventory levels look relatively under control.

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

A couple of questions. In terms of November, why -- or what are the factors that are behind that being the weakest month of the quarter?

As you looked at the quarter, David, we're up, again, we're up against a significant number, there's isn't a compelling reason to shop. We think for the quarter, we're -- planned it fairly conservative. We haven't really changed that guidance since we issued that guidance in August of this year. So we're approaching it as we have approached the year, being fairly conservative and hoping we'll do better.

And you also have a couple of extra days in December before Christmas.

Got you. And then in terms of shrink, I guess this is the first year where your shrink benefit actually has been behind the last few years. How should we think about future opportunities in shrink?

So we have, as you mentioned, David, for the last 3 or 4 years, we've continued to have record levels of our shortage. That again was the case this year. As we get down to these levels, there's just not as much opportunity to carve out that benefit. Now going forward, we'll reduce our shrink accrual to reflect the levels we achieved this year, similar to what we've done over the past 3 or 4 years. So baked into our future guidance will be a lower shrink accrual.

And then my last question, when you look at the packaway purchases you're making, how does the product cost look in the recent purchases relative to the last few quarters?

Favorable.

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

Your traffic has been up very nicely and has been. Can you talk about if there -- if this is consistent across the country and if there's anything that you are looking to do differently or anything that you've changed that is the result of this, away from the strong assortments? Michael O'Sullivan: In terms of traffic, Marni, there's really nothing that we're planning to do that's any different to the approach we always take, which is try and put the best bargains in front of the customer. We've found that over time, that's the most effective way to continue to grow our traffic to our stores. So certainly other things like using marketing to support that we'll continue to do. But nothing dramatically different than what we've done historically.

That sounds great. Can you just remind me, last year's shortage of on the last couple of years, it's been very low. Is this year's level just really more normalized level reserve-wise versus shortage? Or was last year's extremely low? I guess how should we think about that?

No. Actually, last year, we hit an all-time low, and again this year, we hit an all-time low. Just the benefit against that reserve was lower, has more to do with how we were reserving as opposed to the actual results.

So the actual shortage was still very low?

Yes.

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

Just a couple of quick questions. First, I'm wondering what your comp assumption is on a full 14-week basis? Second, any outlook for freight costs? And third, was November -- early November trends impacted by unfavorably warm weather in California? I'm just wondering if you can comment on that.

So on the first, the comp assumption for the 14 weeks as opposed to 13 weeks?

Yes.

So we haven't -- actually, the comp is going to be based on the 13-week assumption, which we said is 1 to 2. As far as your second question on freight, we did experience a little higher freight rates, probably due to slightly higher fuel rates. And we see that rolling through the fourth quarter as well. And the third question, Roxanne?

Was just commenting on California weather early in November?

We don't comment midmonth on sales at this point, Roxanne.

[Operator Instructions] And your next question comes from the line of Alex Fuhrman from Piper Jaffray.

Would like to ask about the continued strength that you guys are having in the Juniors category. I mean, it seems like now, you're starting to lap outperformance in that category now for a little bit of time now. It's been a little bit more than a year now. So I guess my question is as you think about a lot of the department stores have been calling that out as a category of weakness, as we try to get a sense of if this is a long-term secular shift or not, what are you seeing in terms of the average basket size and units per transaction within that category? Do you get a sense that Juniors customer is putting entire outfits together at Ross, or is she really more supplementing her existing wardrobe with more incremental smaller purchases? Michael O'Sullivan: Alex, I'll try to answer that. I think Michael had mentioned in his comments that Juniors was one of our strongest-performing businesses in Q3. In fact, we've been very happy with the Juniors business over the last couple of years. Juniors has always been an important business area for us. We attract -- or within our demographics, we certainly have a number of younger customers, and they are attracted to that Juniors business. In terms of some of the subtleties of what you asked about, in terms of how are they shopping, I don't think we really have a sense of that. All we know is that, like our other customers, they're looking for a bargain, and clearly, we've been able to satisfy them over the past couple of years, and that's what's driven the success [ph] of that business.

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

I've got a question just about the Midwest and also the Home category. Can you tell us roughly how many stores you have in the Midwest that are in the comp basis for the new territories that you just went into? And then how you have, perhaps, adjusted the assortment to be more tailored for the winter month there versus the rest of the country? And then just going back to the Home category, can you just review with us when you started to see the weakness in your Home category? Because I know you mentioned previously that you thought it was a little off-track. And at what point did you feel that you've gotten it back on track to where you'd like it to be on the right trajectory? Michael O'Sullivan: Mark, on the first piece of that, the number of stores in the comp base in the Midwest, at this point, there are no stores in the comp base. We opened the stores -- the first stores in the Midwest were opened last October, and we wait a year and a few months before we actually put those in the comp base. I think your second question was about assortment changes, and I'll make a few comments. Since we've been in Midwest, we've looked to what's selling, what's working, and we've made adjustments, no different to what we would do in any other region. So nothing dramatic, just some tweaks here and there in terms of the assortments. And I think your third question was about Home.

And Home, we saw some issues starting in first quarter, and by third quarter, we were seeing portions of Home get back on track, and we're feeling good about our prospects going forward and getting the rest of it on track.

Your last question comes from the line of Daniel Hofkin with William Blair & Company.

Just one follow-up to an earlier question about the kind of competitive environment. I guess, aside from the issue of hours around Thanksgiving and whatnot, from a pricing or other competitive standpoint, I mean, looking back over your last few third quarter earnings releases, your language is somewhat boilerplate and cautious, and I know that you try to be a cautious management team. But is there anything from a pricing or other competitive standpoint that you feel is changing this year versus the same time last year? That would be my first question, then I have a follow-up.

We're not seeing the pricing being more severe than a year ago, no, at this point.

So it's mostly just kind of the tempo around hours around Thanksgiving so far?

Well, you have that. There is some concern out there that retailers who have a big presence in the Northeast, which is most companies, got hurt with Sandy and might promote a little more aggressively than normal as we move through the month and the holiday season.

Okay. And then back to the Midwest stores, could you talk about, aside from the fact that they're not in the comp base yet, how you feel they're performing at this point relative to your expectation? Michael O'Sullivan: Sure. So Daniel, I think I've mentioned we first opened stores in the Midwest in October of 2011. At this point, we have -- if you combine all the states in the Midwest, we have over 30 stores at this point. But they're all relatively new, so it's kind of too early to provide a full assessment of the sales performance, but the early signs are very positive. The reception we've gotten from the customer base has been great. So everything we've seen in terms of early sales, customer research, "down on the ground" customer feedback, reinforces for us our belief that we're going to be successful in these markets long term.

This concludes the Q&A portion of the call. I'll turn it back for any closing comments.

Thank you. Thank you all for joining us today and for your interest in Ross Stores, and have a great day and a terrific holiday.

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