Ross Stores, Inc. — Form 10-Q Summary
Reporting-period note: Although the request metadata says 2018 Q1, this filing covers the three months ended May 4, 2019, compared with the three months ended May 5, 2018. The interim financial statements are unaudited and were reviewed by the independent auditor.
Business context
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. At quarter-end, the company had 1,745 stores, including 1,502 Ross stores and 243 dd’s DISCOUNTS stores. It opened 28 stores during the quarter and had 94 more stores than a year earlier.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change or context |
|---|---|---|---|
| Sales | $3.797 billion | $3.589 billion | Up 5.8%; comparable-store sales rose 2%, versus 3% |
| Cost of goods sold | $2.702 billion; 71.2% of sales | $2.522 billion; 70.3% | Sales-cost ratio increased about 85 basis points |
| SG&A | $558.3 million; 14.7% of sales | $524.4 million; 14.6% | Ratio increased about 10 basis points |
| Earnings before taxes | $542.4 million; 14.3% of sales | $542.5 million; 15.1% | Nearly flat in dollars; margin declined |
| Net earnings | $421.1 million; 11.1% of sales | $418.3 million; 11.7% | Up about 0.7% |
| Diluted EPS | $1.15 | $1.11 | Up about 4%, including benefit from lower share count |
| Operating cash flow | $509.0 million | $472.1 million | Increase attributed mainly to timing of merchandise receipts and payments |
| Capital expenditures | $95.6 million | $79.8 million | Higher investment in stores and other facilities |
Gross margin pressure reflected higher distribution expenses, freight, buying and occupancy costs, partly offset by improved merchandise margin. Management attributed higher SG&A mainly to costs associated with store growth and higher wages. Net interest income rose to $5.6 million from $0.5 million, primarily due to higher interest income and rates. The effective tax rate was approximately 22%, compared with 23%.
Cash, liquidity, debt, and capital returns
- Cash and cash equivalents were $1.367 billion at May 4, 2019, versus $1.413 billion at February 2, 2019. Cash, cash equivalents, and restricted cash totaled $1.433 billion at quarter-end, down $45.6 million during the quarter.
- Cash used in investing was $95.1 million; cash used in financing was $459.4 million, mainly reflecting share repurchases and dividends.
- Long-term debt was $312.6 million: $250 million principal of 3.375% notes due 2024 and $65 million principal of 6.53% notes due 2021. No borrowings or letters of credit were outstanding under the $600 million revolving facility, which remained available through April 2021. The company reported compliance with debt covenants.
- Following adoption of lease accounting standard ASC 842, the balance sheet included $2.943 billion in operating lease assets and $3.051 billion in operating lease liabilities. The filing reports $198.5 million in net lease cost for the quarter. Lease obligations are significant to the retail business.
- The company repurchased 3.4 million shares for $320.1 million and paid $93.7 million in dividends. In March, the board authorized a new two-year, $2.55 billion repurchase program through fiscal 2020. A $0.255-per-share dividend was declared for payment June 28, 2019.
Outlook, risks, and unusual items
- Management forecast approximately $600 million of fiscal 2019 capital expenditures, funded from cash and operating cash flow, and expected available cash, operating cash flow, credit lines, and trade credit to cover needs for at least the next 12 months.
- Management anticipated a fiscal 2019 effective tax rate of 23%–24%. The filing provides no specific full-year sales or EPS guidance.
- Management cautioned that sales growth and gross margins may not continue. Risks highlighted include intense competition; shifts in consumer spending, preferences, or weather; inventory and markdown management; availability of attractive branded merchandise; supply-chain and information-system disruptions; store-site availability; cybersecurity; trade and tariff changes; and legal, tax, labor, and product-related matters.
- Adoption of ASC 842 on February 3, 2019 added lease assets and liabilities and reduced opening retained earnings by $19.6 million. The company said adoption did not significantly affect earnings or cash flows; prior-year balance-sheet amounts were not restated.
- Pending class-action employment and consumer-protection litigation and other proceedings remained outstanding. Management did not expect their resolution to materially adversely affect financial condition, results, or cash flows. Unrecognized tax benefits were $83.5 million, and certain state tax matters could reduce that balance by up to $9.3 million over the next 12 months.
Facts investors should verify
- Confirm the intended reporting period: the supplied filing is Q1 fiscal 2019, not Q1 2018.
- Track comparable-store sales and gross-margin drivers, particularly distribution, freight, buying, and occupancy costs.
- Assess cash generation and the planned $600 million capital program alongside lease obligations and ongoing shareholder returns.
- Review progress and remaining authorization under the $2.55 billion repurchase program, and the effect of buybacks on per-share results.
- Monitor legal proceedings, tax reserves, and the key operating and market risks described in the filing.