Business context and reporting period
Ross Stores, Inc. operates Ross Dress for Less and dd’s DISCOUNTS off-price retail chains. This unaudited Form 10-Q covers the quarter ended July 30, 2016, and the six months then ended, compared with periods ended August 1, 2015. Although the request metadata says “2015 Q2,” the filing is for 2016 Q2. The interim statements received an independent accountant’s review, not an audit.
At quarter-end, Ross operated 1,317 stores and dd’s DISCOUNTS operated 184, for 1,501 total stores.
Financial results and liquidity
| Metric | Three months ended July 30, 2016 | Six months ended July 30, 2016 |
|---|---|---|
| Sales | $3.181 billion; +7.2% | $6.270 billion; +6.2% |
| Comparable-store sales growth | 4% | 3% |
| Net earnings | $281.9 million; +9.0% | $572.5 million; +5.9% |
| Diluted EPS | $0.71, versus $0.63 | $1.44, versus $1.32 |
| Gross margin | 29.2%, versus 28.6% | 29.4%, versus 29.1% |
| SG&A as a share of sales | 14.8%, versus 14.7% | 14.5%, versus 14.3% |
| Net earnings as a share of sales | 8.9%, versus 8.7% | 9.1%, versus 9.2% |
For the six-month period, operating cash flow was $779.6 million, versus $590.4 million; capital expenditures were $147.4 million, versus $193.1 million. Cash and cash equivalents were $927.7 million at July 30, 2016, up from $761.6 million at fiscal year-end. Inventory was $1.560 billion and current liabilities were $1.751 billion.
Long-term debt was $396.3 million, consisting of $400 million principal of unsecured notes, net of unamortized discounts and issuance costs. The company had no borrowings or letters of credit outstanding under its $600 million revolving facility, available through April 2021, and reported compliance with debt covenants. Management said cash, operating cash flow, credit lines, and trade credit should meet operating, investment, repurchase, and dividend needs for at least the next 12 months.
Changes versus the prior comparable periods
- Quarterly and six-month sales growth slowed versus the prior-year reported rates of 8.7% and 9.2%; comparable-store growth was 4% for the quarter, unchanged year over year, and 3% for six months versus 5%.
- Gross margin improved 60 basis points for the quarter and 25 basis points for six months, mainly from improved merchandise margins and lower buying costs. Six-month distribution costs partly offset the improvement.
- SG&A increased 10 basis points of sales for the quarter and 15 basis points for six months, primarily reflecting higher hourly wages.
- Six-month net margin fell from 9.2% to 9.1%, which management attributed to higher taxes. Diluted EPS rose in both periods, supported by higher earnings and a 3% reduction in weighted-average diluted shares from repurchases.
- Operating cash flow increased, mainly due to higher earnings and the timing and level of packaway inventory receipts and payments. Packaway inventory was 47% of total inventory.
Outlook, risks, and notable items
- Management forecast fiscal 2016 capital expenditures of approximately $325 million, reduced from its prior $425 million forecast primarily because distribution-center projects were deferred. The company had spent $147.4 million in the first half.
- Management anticipated a fiscal 2016 effective tax rate of 37%–38%. The filing provides no specific sales or earnings guidance.
- Management cautioned that recent sales growth and gross margins may not continue. Risks cited include competition, consumer spending and preferences, weather, merchandise availability, inventory and markdown management, supply-chain or systems disruption, cybersecurity, store expansion, legal matters, and maintaining sufficient liquidity.
- Pending class-action lawsuits primarily allege wage-and-hour and consumer-protection violations. Management did not expect pending litigation and other proceedings to materially adversely affect financial condition, results, or cash flows.
- Unrecognized tax benefits totaled $105.4 million; up to $5.0 million could reduce tax expense within the next 12 months. The company said current tax audits were not expected to have a material impact.
- The company repurchased $351.5 million of shares and paid $108.1 million in dividends during the first half. The board declared a $0.135-per-share dividend in August, payable September 30, 2016.
- Contractual obligations totaled $6.078 billion, including $2.444 billion of operating lease obligations and $2.144 billion of purchase obligations. The company identified adoption of the new lease accounting standard, effective for it beginning fiscal 2019, as under evaluation.
Important facts for investors to verify
- Confirm that the reporting period is Q2 2016, not Q2 2015, and review the comparable-period dates.
- Track comparable-store sales, merchandise margins, wage-related SG&A pressure, and whether the six-month margin trends persist.
- Assess cash-flow variability from packaway inventory and trade-credit timing, alongside the planned capital-spending deferral.
- Review the scale of lease and purchase obligations, debt maturities and covenants, and continued funding of repurchases and dividends.
- Monitor the resolution and potential financial effects of litigation, tax matters, and other disclosed operating risks.