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PLEASANTON, CA-Ross Stores Inc., the operator of Ross Stores and DD’s Discounts, on Wednesday reported higher sales and profits for the second quarter ended July 31 and said in its quarterly conference call that it is looking for “the optimal expansion strategy.” Michael Balmuth, president and CEO of Ross, said in the conference call that “in hindsight,” the company now realizes that it “took on too much in terms of infrastructure initiatives and growth” in recent years.

For the quarter, Ross reported earnings of $42.3 million, or 29 cents per share, compared with $32.2 million, or 21 cents per share, for the comparable quarter last year. The earnings results for last year’s second quarter reflected a non-cash after-tax charge of $11 million, or 7 cents per share, related to the write-down of the company’s former corporate headquarters and distribution center in Newark, CA.

Second quarter sales this year rose 16% to nearly $1.2 billion, from slightly more than $1 billion for the quarter ended July 31 last year. Comparable store sales for this year’s second quaurter increased 7% from last year.

Balmuth, commenting during the conference call on the company’s long-range plans, said, “We still believe that Ross and DD’s combined can approach 1,000 store locations by the end of fiscal 2008, with plenty of additional room for growth in subsequent years.” However, Balmuth’s remarks suggested that Ross might decide to modify its expansion strategy.”We have begun to take an in-depth look at new-store productivity, especially in newer markets,” Balmuth said. “Although improved over 2004 levels, new-store productivity in our newer markets is underperforming both our expectations and new-store productivity in markets with more longevity.”

Balmuth said that Ross is engaged in “some detailed long-range planning and analysis that looks at every component of the financial model, including new store productivity and contribution, new market performance, and opportunities to recover operating margins.” The objective of the analysis is “to identify the optimal expansion strategy that balances growth with operating margin recovery and improved return on equity and assets over the longer term,” Balmuth said.

Although Ross has not yet reached the point where it can discuss details of how it might alter its expansion strategy, Balmuth said that the company expects to have further details available at its third-quarter conference call, which is scheduled for Nov. 16. He said the review of the expansion strategy follows the company’s realization that, in hindsight, it took on too much at one time. “During the three-year period from 2001 to 2004, we replaced virtually every system in our business while also investing in an entirely new distribution center network. At the same time we accelerated our annual unit growth into the low- to mid-teen range,” Balmuth said.

Balmuth noted a number of positive trends at Ross too, including “solid cash flows” that provide the funding for capital investments in new-store growth and infrastructure. The cash flow is also funding the company’s stock repurchase and dividend programs, he added.

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