Welcome to the Ross Stores second quarter 2007 earnings release conference call. The call will begin with prepared comments by Michael Balmuth, Vice Chairman, President and Chief Executive Officer, followed by a question-and-answer session. (Operator Instructions) At this time I would like to turn the call over to Michael Balmuth, Vice Chairman, President and Chief Executive Officer.

Good morning. Joining me on our call today are Norman Ferber, Chairman of the Board; Gary Cribb, Executive Vice President and Chief Operations Officer; Michael O'Sullivan, Executive Vice President and Chief Administrative Officer; John Call, Senior Vice President and Chief Financial Officer; and Katie Loughnot, Vice President of Investor Relations. We will begin our call today with a brief review of our second quarter performance followed by our outlook and guidance for the back half of 2007. Afterwards, we will be happy to respond to any questions you may have. Before we begin, I want to note that our comments in this call will contain forward-looking statements regarding expectations about future growth and financial results and other matters that are based on management's current forecast of aspects of the company's future business. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from historical results or current expectations. These risk factors are detailed in today's press release and our fiscal 2006 Form 10-K on file with the SEC. Today, we reported earnings per share for the 13 weeks ended August 4 2007 of $0.37, up 16% compared to $0.32 for the 13 weeks ended July 29 2006. Net earnings for the quarter were $50.9 million compared to $45.4 million for the prior year period. Sales for the 13 weeks ended August 4, 2007 were $1.445 billion, up 10% over the second quarter of fiscal 2006. Comparable store sales for the second quarter of 2007 grew 2% on top of a 4% gain in the prior year period. Earnings per share for the six months ended August 4 2007 rose 16% to $0.85 from $0.73 for the six months ended July 29, 2006. Year-to-date net earnings were $117.9 million compared to $104.6 million…

Your first question comes from Michelle Clark - Morgan Stanley. Michelle Clark - Morgan Stanley: First, can you breakdown the components of gross margin by basis point contribution during the second quarter? Second, can you comment on what you are seeing in terms of August sales trends? Have you seen any pick-up relative to July? Third, if you could just touch upon the performance at those dd's locations, what do you think is causing the slower than expected ramp? Thank you. John Call: I will take the first piece on the gross margin components. As Michael said in the prepared remarks, merchandise margin was flat, although we did benefit 10 basis points from a lower shrink accrual. We also had occupancy leverage due to lower pre-opening ramp than we anticipated on the Albertsons conversion. That was about 20 basis points on the plus side. We also levered buying comps by about 10 basis points. The offsets to those pluses were our freight costs were 20 basis points to the bad, a continuation of our first quarter trend. As we look to the back half, we will anniversary those higher freight costs, so we won't have that drag in the third and fourth quarters. Also as Michael mentioned, the distribution centers delevered by about 20 basis points and that really relates to a certain packaway carrying cost that follow those goods through to when they sell. Our packaway levels were down from our first quarter to second quarter. Therefore, we got a little bit of a hit the P&L. That is merely a timing issue. We expect that to reverse in the third quarter as well. So for the year, we expect the DCs to still be on plan to deliver about 10 basis points of improvement on top of the…

Your next question comes from Jeff Black - Lehman Brothers. Jeff Black - Lehman Brothers: Michael, a question on just the overall comp guidance. What do your comps assume going forward from California and Florida and are we seeing any weakness specifically in California that would lead you to lower that comp rate? Secondly, is there anything in traffic conversion overall that you are getting a clue on now that makes you want to pull the trigger and lower the comp guidance here? Thanks. Gary Cribb: When we look at California and Florida, we separate the two. California is performing slightly better than the company today. Florida, as Michael noted in his comments, continues to trail the chain in the minus low single-digit area and we have seen that trend for a while now. Your second question was on conversion? Jeff Black - Lehman Brothers: The second question is the overall traffic trends. I mean Florida has been weak. We know that. You know that. Has California now joined Florida for weakness and do we have anything alarming across the rest of the chain either in the Southeast, Mid-Atlantic that would lead us to lower the comps? I mean you did point out you think things are getting weak, but you didn't really nail down where and why. Gary Cribb: We aren't seeing anything alarming in California. Florida has continued on its trend. Part of our conservative outlook is just there is a lot of uncertainty as it relates to the economic markets and a lot of our fellow retailers have had negative projections for the back half, but we are hopeful that we will do better. I think we are just taking the prudent conservative posture.

Your next question comes from Jeff Klinefelter - Piper Jaffray. Jeff Klinefelter - Piper Jaffray: Yes, two quick questions. One on the home category. This has been noted as an area of strength for you for several months. It has also been noted by many other retailers in department stores. Any opportunities for you to chase expanded assortments within home or what categories specifically represents opportunity now going into the second half? The second one is on Florida. With the weakness there, likely some of it being the housing market-driven consumer sentiment changes in spending, do you have opportunities to go in and do some stepped-up level of marketing or any special event marketing to try to take the opportunity to deliver more value to some of these consumers?

Relative to home, given the softness other retailers have, you use the word chase, there are opportunities, maybe more so than normal in the market there. That is fairly broad-based within the home business and that is a good thing for us. On the second part of the home question, the opportunities we have isolated are really much more in the gift giving part of home and we have a much stronger position in those for the holiday period. Relative to marketing, specifically for Florida, we have a focus at our company and it is really more on improved assortments and tailoring our assortments to what we think the customer wants and putting the best bargains out. We probably wouldn't take a marketing advantage down there. We would look specifically for merchandising opportunities that were more sustained in the area as opposed to just increasing marketing to drive our business.

Your next question comes from Brian Tunick – JP Morgan. Brian Tunick - JP Morgan: Michael, your comments on the competitive landscape, does that mean that the competition is in the buy of the goods out there or more on the promotional cadence, that delta that we always talk about between you guys and the department stores? Secondly, maybe just update us as usual on the micro-merchandising rollout and sort of where are we in that timing?

Could you elaborate on the first question? Brian Tunick - JP Morgan: I think you mentioned a couple of times in your script about the competitive landscape or competition and we are just wondering is that competition for the buys, i.e. TJ and others?

Okay. I understand. Brian Tunick - JP Morgan: Or is it in the promotional landscape in the department stores?

Actually it is promotion. Mostly when I look at this and really what I was referring to in the comments was the promotional landscape by department, specialty, discount that could happen based on the more recent lowering of sales and earnings expectations by the more mainstream sets of key retail information sector. On the buy side, that is not the issue. The off-price, basically what we watch for is the promotional beat out there in department stores and when you have these kind of macroeconomic issues coupled with a drop in sales projections, there is a potential for mainstream retailers to become more aggressive promotionally and that is what we are referring. Michael O’Sullivan: Brian, on your second question about micro-merchandising, let me give you a quick update on that. As you know, the main objective of that program is to improve our assortments at a local level and improve our ability to trend at a more detailed level in stores. I think we have said in the past, 2007 is really the year that we are sort of building those capabilities and those processes and I think that building process is going well. We expect to roll out the program on a pilot basis in early 2008 and then to expand it to our main businesses in the following couple of years after that. So it is going to be a while before we see any results of that activity, but we are pretty happy with how it is going in terms of the development of the program.

Your next question comes from Kimberly Greenberger - Citigroup. Kimberly Greenberger - Citigroup: Michael, I was hoping you could talk about two things that you mentioned. Number one, you are seeing an opportunity to further reduce inventory in your stores. Is that based on some sort of analysis of how the inventory is flowing in the stores or is this a reaction to the external environment or some combination thereof? Secondarily, you talked about the higher level of markdowns coming into the second quarter as a result of the April sales shortfall. Could you just talk about markdown levels here at the end of July, how that compares to last year? John, if you could just give us the comp metrics for second quarter, how the 2% breaks down between average dollar sale and traffic? That would be great. Thanks.

I will take the first one. Essentially I think your question is why do we think we can take our inventory down? We have looked at turns across the store and we have looked at markdowns and we have looked at that very closely. In hindsight, it is very clear to me that we carry too much inventory and if you couple that with the choppiness that we found all season in our sales -- and by that I mean that we had a better than expected March and we had a worse than expected April, we had a better than expected June, we ran into trouble, our business slowed down starting in mid July. So the consumer is shopping not in as predictable a pattern. With that, we think we put ourselves in better stead by carrying less inventory and I saw it late and I should've seen it sooner, but I think by doing this, we put ourselves in a much better position to preserve our margins to the degree that we can out there depending on what the environment becomes. In our off-price model, we can always run after merchandise if in fact we found that we've gotten a little bit too conservative. John Call: Kimberly, the second part of your question I think was what is driving the comp. Our average retails were flat year-over-year. The comp was driven about half by more transactions and half by the basket was up by about a point. Kimberly Greenberger - Citigroup: Great. Any comment on the level of markdown inventory here at the end of July versus last year?

I think as we went in at the end of July, our inventories were slightly higher than we wanted them to be and I think that has been reflected in our guidance as we ended the third quarter to get us positioned pretty offensively as we come into the back half.

Your next question comes from Mark Montagna - C.L. King. Mark Montagna - C.L. King: Hi, just a question about the overall buying environment. You mentioned on the last call that it is better than normal. So I am wondering if you could explain to us how much longer you expect this better than normal environment to continue? Should it continue all the way through next year and could it perhaps get better? Then just regarding Florida, California and Texas, hoping you could tell us what the year-to-date comp store sales are for those three states?

Relative to the product availability and I did say it was better than normal and it continues that way; how long this will go on, I think it really ties to how erratic consumer behavior is and I expect it certainly to be through the rest of this season, probably into early spring. But beyond that, it is hard for me to see. If it does continue to be erratic sales behavior by the customer across the board in retailing, it would continue for some time, but I couldn't get closer than that. Gary Cribb: On sales in California, Texas and Florida, those are the three states? Mark Montagna - C.L. King: Yes. Gary Cribb: Year to date, California, as we said earlier, is up 2%. That is on top of 3% from a year ago. Texas is up 1% on top of 8% from a year ago. They had a terrific year last year. Florida is trending down 3%. Mark Montagna - C.L. King: Versus what number? Gary Cribb: Versus basically flat a year ago.

Your next question comes from Paul Lejuez - Credit Suisse. Paul Lejuez - Credit Suisse: So to touch on the dd's weaker openings, just to be clear, were the weaker stores in new markets, the Texas and Florida markets that you mentioned? How did those two markets perform with the new dd's? Also, could you tell us what the 26 comp stores within dd's have done? What is the comp performance there? Michael O’Sullivan: On the new stores, first of all, we only have the March opening group to go on. The July opening group is too recent to really look at. But the March opening group, as I said earlier, only two of those stores were outside of California. They were in Florida. So the March opening group, there were no Texas openings. In terms of performance, to be honest, the mixed performance that Michael described was actually across the board. It was the two Florida and the six California stores. So there is no obvious pattern. It is only eight stores and it is pretty early days. Now obviously as we get further into the year, we will look at the July open group and then the open group that we have coming up in October and we will be able to draw more conclusions. On the comp stores, the comp stores have been performing on plan, so we are pretty comfortable with that. They have been doing well against their plan. Paul Lejuez - Credit Suisse: Any sense of the comp level that you can share with us?

At this point, we are not breaking out the comps separately. John Call: I would just like to add that as we have opened stores in this chain since the very beginning, stores have not opened magically, okay? We have to fine tune the assortment by store and they have moved up, so this is not something that is so new to us; we are just passing it along. Paul Lejuez - Credit Suisse: Is there anything in your recent history that you have seen happening in the market that is similar to what is going on in Florida right now? I am just wondering how you reacted then versus how you are reacting now.

I will speak to how we are reacting now and how we tend to react when any market is down. Obviously we can't control the outside environment. We look internally at assortments, we look internally at the operation and we focus on what we do best and that is how we have handled it in the past and how we are handling Florida today. John Call: We also know in Florida that there's things internally that we have made mistakes on that we are working to correct as rapidly as we can.

Your next question comes from David Mann - Johnson Rice. David Mann - Johnson Rice: Could you comment a little bit on the performance of the newer Ross Stores this year? And also some of the stores that you have opened in the Southeast had struggled. Can you just give us an update on what kind of progress you feel like you are making there? Michael O’Sullivan: Let me take both parts of that. On the new stores this year, the new stores this year have performed in line with new stores over the past couple of years, which as we have said in the past, we are not satisfied with. We want to improve the performance of new stores and some of the initiatives that we have discussed earlier on in the call are aimed at that. So we certainly hadn't expected any improvement this year and they have stayed comparable to the last couple of years. On the Southeast, the Southeast has actually done a little bit better than the chain year to date. It has actually comped slightly better than the chain, so we are pleased with that. So that is the summary. David Mann - Johnson Rice: Any reason in terms of what you are doing that you think is driving it to be a little bit better or you think it is just a little better economy in those areas relative to the rest of the country? Michael O’Sullivan: I wish I could say it was us. We have made some adjustments in the Southeast, but I would have to say I think it is probably more of a regional issue in terms of the economy. There are things that we are doing, but as I say, I think it is going to be a year or two before they bear fruit, so I don't think we can claim the credit for that. David Mann - Johnson Rice: In terms of the merchandising initiatives that you have in place for the back half, can I just clarify, are they in place now that we should see them in the store or are they going to ramp up throughout the back half to where the benefits are going to occur as they ramp up? John Call: I think it's the latter, David. They are going to ramp up as we go through the course of the season. Some areas might kick in a little earlier than others based on planned receipt flows, but it is going to be a gradual movement through the course of the season. David Mann - Johnson Rice: Would that be the ramp for all of the things we have talked about in terms of the younger focus and the brands and the other categories like jewelry and gift giving? John Call: Correct.

Your next question comes from Patrick McKeever - Avondale Partners. Patrick McKeever - Avondale Partners: A question on the inventory shrink number. I think, Michael, you said that it helped gross margin by about 20 basis points on the quarter, but you weren't accruing a significant benefit for the third quarter or not anticipating an incremental benefit in the third quarter or fourth quarter. Where does shrink stand as a percent of sales right now and where do you think it can go over the next year or so? John Call: Patrick, this is John. In the second quarter, we benefited by about 10 basis points on a lower accrual. In the third quarter last year, we actually benefited by about 30 basis points due to the catch-up when we took the actual physical. We have not scheduled in any improvement in the guidance we gave. We are hopeful that it gets better. We are focused on it, but we haven't included that in any of the back half guidance today and relative to what the overall shrink number is, we haven't disclosed that. Patrick McKeever - Avondale Partners: I know you only do inventories once a year in September, take a full inventory in September, but I guess you have done some checks to give you confidence that it might be better? I am not saying that you are suggesting it could be better, but the tone is positive I guess around that issue. John Call: Yes, we have put a number of measures in place. We have invested in various loss prevention activity around the chain and we know that they bore fruit last year and we're hopeful they will bear fruit this year.

I would add to that, Patrick, that we do look at a myriad of indicators and react when those indicators aren't moving in the right direction. So with that, we are hopeful that we are going to see improvement. Patrick McKeever - Avondale Partners: One quick one on Florida and Texas, so you are saying that the later back-to-school holidays in those two states should benefit comps by about 1 percentage point in August?

Yes, that is based on the tax-free shift. We said that it got to the point in July and that will come back in August. Patrick McKeever - Avondale Partners: Is that what you anticipated then?

It is in the guidance, yes. Patrick McKeever - Avondale Partners: But I mean you have seen the results from stores in those states in Texas and Florida. Have the later tax-free holidays generated the sales that you anticipated? I know it is in guidance, but relative to your prior expectations?

So the answer is that it did benefit us by about a point, it cost us a point in July and benefited us by a point in August and we will come out with our August sales guidance to give more color around it. We are not going to comment mid-month.

Your next question comes from Rob Wilson - Tiburon Research Group. Rob Wilson - Tiburon Research Group: You mentioned in your prepared remarks that there was an insurance recovery this year and also there were lower legal costs. Could you quantify those and also could you help us understand why there was no interest income in Q2?

Relative to the legal costs and the store fire recovery, we had a benefit based on insurance proceeds for an incident that occurred in the past that we picked up in the quarter. The legal expenses, we continue to evaluate the various cases we have ongoing and make adjustments. So all in, those were worth about $0.01 on the quarter. Relative to interest income during the quarter, had to do with what our cash balances were during the quarter, so relative to the debt we have outstanding were offset by the cash comps we had on which we earned income. I don't know if that helps you out, Rob. Rob Wilson - Tiburon Research Group: Yes. You had guided the flat interest expense I guess in the quarter, but now you are guiding to, what, $1.5 million in Q3? Why the difference?

Based on our view of cash, I think the number is actually $1 million, not $1.5 million in the third quarter, based on looking at the cash and where we think it will be based on capital investments. Rob Wilson - Tiburon Research Group: Okay. None of that is related to FIN 48?

Not on the interest expense, no. Rob Wilson - Tiburon Research Group: One other question. You had previously said that dd's would cost you 35 basis points this year. Now that you have had a little bit slower start in some of your new markets for dd's, has that changed your thought process regarding the basis point impact this year?

No, we said the drag is about 35 basis points north of where we were in our prior year. Again, as Michael O'Sullivan mentioned, a little tough to tell as how these dd's stores are coming out of the box. We don't think it will be materially off the 35 basis point drag.

Your next question comes from Marni Shapiro - Retail Tracker. Marni Shapiro - Retail Tracker: Hey, guys. Just two things. Michael, you commented that you made some mistakes in Florida and you left us sort of hanging there, so if you could just put a little bit of insight around that. Then if you guys could also talk a little bit about dd's. When I was out there, we noticed some new signage in dd's. You were changing things around, the way things were put on the floor. If you could talk about any benefits you are seeing from that and any thoughts to making some changes at dd's across the chain and/or at Ross Stores based on what you are seeing. Gary Cribb: We started seeing a negative trend in Florida going back to the end of '05 and as I said earlier, we looked internally to see what the issues are. We had pretty serious operating issues that were pretty broad, broad spread across the state. We have made significant inroads into those operating issues, but any time you have a market that is broken, it takes time to get the right people in place and get the operation back on track. We think that we have made progress. We continue to see progress in Florida and I would say we are on track to where we want to be relative to our own internal turnaround in that state.

Your second question was on dd's signage. Marni Shapiro - Retail Tracker: You changed the signage and the way some of the displays were on the floor, putting the higher display cases off to the sides so the floor felt more open. Gary Cribb: Sure. Obviously, it is a new concept for us and we are always looking at better ways to improve the floor and listening to our customer of course and from that research, we did make some changes in our signage. I would say you will see brighter, more vivid signs that are more reflective of the chain and the customer. We did move higher fixturing to the outside to improve sightlines and I think you will continue to see slight tweaks in the prototype as we continue to learn more about the business. Marni Shapiro - Retail Tracker: Any of that transferable to the Ross Stores? Gary Cribb: There are certain things that we do learn from dd's and look to see how we can bring them into Ross. I would say that from a signage perspective, we actually took it from Ross. We changed our Ross signs about three or four years ago and had some good learnings from that and applied them to dd's, but we do maximize and leverage both companies. Kelly Loughnot: Hello? Hello? Who's this? We are on the call here. Is anybody there? This is the Ross conference call. Hello?

Thank you for your patience. The conference will resume at this moment. Your next question comes from Brian Tunick – JP Morgan. Brian Tunick - JP Morgan: Okay. Hey, guys. We stuck around. I guess our question is if we look at the guidance here, it is possible that you have flat to down gross margins for the year and I guess we look back and I guess The Street holds that carrot of that 25% to 26% gross margin you had in the '02, '03 level. Is that just sort of unrealistic that you can get back to those levels and just sort of walk us through your thought process there?

So as we look at -- are you still there? Brian Tunick - JP Morgan: Yes, I'm here. Someone's child is on the phone.

Yes, okay. It sounds like you have company. So operating margin at least for the third quarter looks to be down based on our guidance, down 20 basis points, up 30 basis points. Included in that guidance, obviously there is a process that we went through and a more conservative look at the third quarter where we believe the competitive trend will be. We have also maintained that over the long term, we believe we can incrementally get back to 30 to 50 basis points on an annual basis. That's if we perform from a sales standpoint. So although I think we are making progress, chipping away at it, we just want to make sure that we are realistic because we've come into what looks to be a pretty difficult back half. Brian Tunick - JP Morgan: Right. But I guess looking back to 2004 where the problems really started, DC systems, lower productivity, higher payroll, higher markdowns, I mean some of those things should be alleviated just going forward and it doesn't seem like we are making a lot of progress, I guess DC productivity. Is 25%, 26% gross margins realistic again?

Let's address each one of those individually. So DCs are making progress in terms of productivity. Yes, they are on plan. We are up against freight headwinds that we didn't have back then. Our shrink is recovering, making progress on that. So I think, Brian, as we look to it again, we want to be consistent with how we are executing. We want to make sure we are making the progress we need to make. We have also always maintained that it is going to take a period of time. We are not going to recover back to historical levels in a 12-month period. It is going to take some time and we are on track with where we believe we need to be. We believe there are some opportunities in the back half if we can outperform on the sales line. Brian Tunick - JP Morgan: Am I right that you need a 3% to 4% comp for leverage?

Yes, that is where we have been on the expense line.

Your next question comes from Dana Telsey - Telsey Advisory Group. Dana Telsey - Telsey Advisory Group: Good afternoon, everyone. Given the sale of some of the Liz Claiborne brands and the changes in the apparel manufacturing industry, does it ever makes sense for you to buy a smaller brand, a private label within your stores or does that just not fit? Also can you talk a little bit about the integration and the openings of the 46 Albertsons stores? Are there other real estate deals out there that could potentially be like that? Thank you.

Dana, in terms of buying a defunct label or doing private label, it really doesn't fit with our strategies. We have looked at it and it is just not where we want to take it. We would rather continue to buy branded product and if we ever want to do make-ups, we would rather do it with people who have brands that are known across America. Michael O’Sullivan: On the second question, Dana, obviously as we open stores, we are looking for new real estate, but I wouldn't comment on any specific opportunities that are out there.

Your next question comes from Rob Schwartz - JL Advisors. Rob Schwartz - JL Advisors: I am still a little confused on the Texas, Florida shift. Did you already see the 1% benefit you are expecting to get in August given that Texas began a week ago and Florida beginning of the month? Or is that based on what you expect to see at the end of the month? John Call: Yes, the sales tax shift already occurred. We did see the benefit in our guidance. We will have more color as we comment on August when we release August sales.

Your next question comes from Rob Wilson - Tiburon Research. Rob Wilson - Tiburon Research Group: Can you give us a sense for how you would classify your product maybe from a 30,000 foot level of good, better, best and have there been any changes in the last 12 months?

So you want me to classify how much of our product is better merchandise? Rob Wilson - Tiburon Research Group: I think in the past you have said better versus moderate.

I would say within our apparel, we really were referring to apparel and apparel-related products. Better would represent in the low 20% of our inventory and the rest would really be what we consider moderate. Rob Wilson - Tiburon Research Group: Has there been any shift in the last 12 to 18 months?

Not dramatic. Area by area, there could be, but in the overall, not material.

Your next question comes from William Keller - FTN Midwest. William Keller - FTN Midwest: First, if you could just give us a selling square footage at the end of the quarter. Secondly, looking at the back half of the year, do you still expect CapEx around $290 million? If you can give us some idea what the cadence of that will be over the next two quarters, that would be appreciated. Thank you.

Yes, relative to capital spend, we are still at the $290 million for the year and we haven't broken that out relative to what that cadence would be. Clearly, the biggest piece of that will be building new stores and then also be some investments in our distributions in our network. Relative to average selling square footage, our boxes are pretty uniform in size. Ross is about 25,000 feet. You can do the math to calculate the footage and dd's is probably between 20,000 and 25,000. So you can just look at the units; and that is selling in-store.

Your next question comes from Rob Schwartz - JL Advisors. Rob Schwartz - JL Advisors: On the last call, you spoke about availability of product and how you thought it really benefited you in the second half. Can you talk about when this quarter you really expect us to see the impact in the stores and your sales numbers from this product?

Well, you would see it as we roll through the season, and it will vary by area. Its impact in terms of sales line, we would expect to do better than we would have had the retail environment not become maybe potentially more promotional. We will see. But you will see changes in our stores as we are becoming more significant as we roll through this season.

There are no further questions. I would like to hand the floor back to the speakers for any closing comments.

Thank you all and have a very good day.