Ross Stores, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2020 Q3, but this filing covers the quarter ended October 30, 2021 (fiscal 2021 Q3), and the nine months then ended. Amounts below are in U.S. dollars. Interim statements are unaudited; Deloitte performed a review, not an audit.
Business context and results
Ross operates Ross Dress for Less and dd’s DISCOUNTS off-price retail chains. At quarter-end it had 1,924 stores: 1,629 Ross and 295 dd’s DISCOUNTS. Management says fiscal 2019 is a more useful operating comparison than fiscal 2020 because pandemic-related closures materially disrupted 2020.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $4.575 billion | $3.755 billion | $13.896 billion | $8.282 billion |
| Net earnings (loss) | $385.0 million | $131.2 million | $1.356 billion | $(152.6) million |
| Diluted EPS | $1.09 | $0.37 | $3.82 | $(0.43) |
| Net margin | 8.4% | 3.5% | 9.8% | (1.8)% |
| Cost of goods sold as % of sales | 72.7% | 72.2% | 71.5% | 80.7% |
Q3 sales rose 21.8% year over year; comparable-store sales increased 14% versus Q3 2019. Nine-month sales rose 67.8% versus 2020, a comparison heavily affected by prior-year store closures, and were up 19.5% versus 2019. Versus Q3 2019, Q3 2021 pretax margin was 11.0% versus 12.5%, and net margin was 8.4% versus 9.6%. Nine-month net margin was 9.8% versus 10.4% in 2019.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $1.504 billion, down from $1.783 billion in 2020 and up from $1.411 billion in 2019. The year-over-year decline mainly reflected lower accounts-payable leverage and higher inventory investment.
- Capital expenditures were $377.9 million; management projected approximately $550 million for fiscal 2021, including continued construction of its Brookshire, Texas distribution center.
- At October 30, cash and cash equivalents were $5.260 billion; total current assets were $7.845 billion and current liabilities $4.476 billion. Inventory was $2.231 billion, up from $1.509 billion at January 30, 2021.
- Total debt carrying value was $2.516 billion, including $65.0 million due in December 2021. The $800 million revolving facility had no borrowings or facility letters of credit outstanding and remained available through July 2024. Cash exceeded debt by approximately $2.744 billion, before lease obligations.
- Nine-month financing outflows included $417.0 million of share repurchases and $304.5 million of dividends. The company had authorized a $1.5 billion repurchase program through fiscal 2022, with plans for $650 million in fiscal 2021 and $850 million in fiscal 2022.
Changes, outlook and risks
- Compared with 2020, earnings rebounded as stores remained open; the prior-year period included pandemic closures and approximately $240 million of debt-refinancing costs. Compared with 2019, Q3 merchandise margin was pressured: management cited a 125-basis-point increase in freight costs and a 40-basis-point decline in merchandise margin, partly offset by occupancy and distribution-cost leverage.
- Management remained optimistic about the rest of fiscal 2021 but gave no specific sales or earnings forecast in this filing. It expected higher freight, distribution and wage costs, as well as COVID-related operating costs, to continue through fiscal 2021. It planned to return to approximately 100 new store openings in 2022; 65 stores had opened in fiscal 2021 through the quarter.
- Management cited worsening industry supply-chain congestion, holiday-season uncertainty, freight expense, and uncertainty around COVID-19 duration, variants, resurgences, mandates and consumer demand. It also identified inflation, consumer spending, inventory management, competition, merchandise availability, cybersecurity and operational disruption among risks.
- Pending class and representative actions, mainly involving employment and consumer-protection claims, and other proceedings were described as not expected by management to have a material adverse effect. Unrecognized tax-benefit reserves were $76.9 million; management said certain matters could reduce the total by up to $9.5 million over the next 12 months.
Investor verification priorities
- Confirm the intended reporting period: this filing is fiscal 2021 Q3, not 2020 Q3.
- Assess comparable-store growth against 2019 and whether freight and distribution pressures persist or ease.
- Track inventory receipts, packaway inventory (31% of inventory at quarter-end), and accounts-payable leverage amid supply-chain delays.
- Verify the fiscal 2021 capital-spending and store-opening plans, repurchase execution, and dividend capacity against operating cash flow.
- Monitor repayment or refinancing of the $65 million notes due December 2021, and developments in legal and tax matters.