Ross Stores, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2010, ended October 30, 2010. The filing compares results with periods ended October 31, 2009. Although the request metadata identifies 2009 Q3, the filing itself covers 2010 Q3. Financial statements are unaudited; the independent accountant performed a review, not an audit.
Business context
Ross operated 990 Ross Dress for Less stores and 67 dd’s DISCOUNTS stores across 27 states and Guam and six states, respectively, for 1,057 stores total. The off-price retailer sells apparel, footwear, accessories, and home goods. It opened 56 stores and closed four in the first nine months; the year-over-year net increase was 49 stores.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Sales | $1.874 billion | $1.744 billion | $5.721 billion | $5.204 billion |
| Comparable-store sales growth | 3% | 8% | 6% | 5% |
| Net earnings | $121.4 million | $105.1 million | $393.0 million | $299.9 million |
| Diluted EPS | $1.02 | $0.84 | $3.26 | $2.39 |
| Net margin | 6.5% | 6.0% | 6.9% | 5.8% |
- Sales increased 7.5% in Q3 and 9.9% year to date, supported by new stores and comparable-store growth. Q3 comparable growth slowed from the prior-year 8%.
- Cost of goods sold was 72.9% of sales, down 80 basis points in Q3 and 140 basis points year to date. Management cited improved merchandise margin, distribution-cost reductions, and occupancy leverage, partly offset by higher buying, incentive, and freight costs.
- SG&A was 16.6% of sales in Q3, up 20 basis points, primarily from higher incentive costs; year to date it was 15.9%, down 30 basis points due to expense leverage.
- Q3 net earnings rose about 16% and nine-month earnings about 31%. Diluted EPS rose 21% and 36%, respectively, helped by lower diluted share counts following repurchases.
- Nine-month operating cash flow was $426.8 million, versus $583.9 million in 2009. Management attributed the decline primarily to higher packaway inventory and incentive-bonus payments. Capital expenditures were $149.7 million, compared with $124.2 million.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $732.8 million at October 30, 2010, versus $768.3 million at January 30, 2010. Current assets were $1.905 billion and current liabilities $1.248 billion.
- Long-term debt was $150 million: $85 million of 6.38% notes due in 2018 and $65 million of 6.53% notes due in 2021. There were no borrowings under the $600 million revolving facility, which expires in July 2011; $230.4 million remained available under its letter-of-credit sublimit. The company planned to renew the facility in 2011 and was in covenant compliance.
- Cash used for financing was $313.3 million, including $287.3 million for common-stock repurchases and $58.3 million of dividends, partly offset by stock-plan proceeds and tax benefits. A two-year $750 million repurchase program had $463 million remaining at quarter-end.
- Management forecast approximately $200 million in fiscal 2010 capital expenditures and said cash, operating cash flow, credit lines, and trade credit should cover operating needs, planned investment, repurchases, and dividends for at least twelve months.
- Contractual obligations totaled $3.541 billion, including $1.981 billion of operating rent obligations and $1.246 billion of purchase obligations. These include substantial lease and inventory commitments.
Outlook, risks, and unusual items
- Management expected a fiscal 2010 effective tax rate of 38%–39%; it provided no specific sales or earnings guidance in the supplied filing text. Management cautioned that current sales and gross-margin trends may not continue.
- Key business risks include competition, consumer demand and economic conditions, weather, availability of desirable branded merchandise, supply-chain disruptions, store-site availability, and execution of merchandising, systems, and expansion plans. The company noted substantial California concentration: its headquarters, Los Angeles buying office, two distribution centers, and 26% of stores were in California.
- Pending wage-and-hour class actions include claims concerning meal and rest breaks and alleged unpaid overtime for store managers and assistant managers. Management did not expect pending litigation to have a material adverse effect, but outcomes remain uncertain.
- Unrecognized tax-benefit reserves, including related interest, were $38.1 million, versus $29.6 million a year earlier. Management said up to $1.5 million could reduce tax expense if certain statutes of limitation lapse within twelve months; state tax audits were not expected to have a material impact.
- A $70 million synthetic lease on the Perris distribution center includes a residual-value guarantee of up to $56 million if a third-party sale falls short. The company reported compliance with applicable covenants. A 100-basis-point interest-rate change was not expected to have a material impact.
- The November 2010 board declaration of a $0.16-per-share dividend, payable December 31, was subsequent to quarter-end. The adopted accounting standard described in the filing had no material financial-statement impact.
Important facts for investors to verify
- Whether Q3 comparable-store growth of 3% and improved gross margins persisted beyond the reporting period, especially given the slowdown from the prior-year Q3 comparison.
- Inventory levels and packaway exposure, the principal stated factors behind lower operating cash flow; inventory was $1.048 billion at quarter-end.
- Progress on renewing the $600 million revolver before its July 2011 expiration and continued compliance with debt and lease covenants.
- Execution and funding of the $200 million capital-spending plan and remaining stock-repurchase authorization, alongside lease and purchase commitments.
- Developments in wage-and-hour litigation and tax audits, and any changes to the $38.1 million unrecognized-tax-benefit reserve or the Perris lease guarantee.