Ross Stores, Inc. - Q1 2008 Financial Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended May 3, 2008. Ross Stores, Inc. operates as the second-largest off-price apparel and home goods retailer in the United States, operating under the banners "Ross Dress for Less" and "dd's DISCOUNTS." As of the period end, the company operated 918 stores (864 Ross and 54 dd's DISCOUNTS) across 27 states and Guam.
Key Financial Metrics
| Metric ($000s) | Q1 2008 | Q1 2007 |
|---|---|---|
| Sales | $1,556,328 | $1,410,541 |
| Net Earnings | $79,485 | $67,044 |
| Diluted EPS | $0.60 | $0.48 |
| Operating Cash Flow | $160,835 | $(66,045) |
| Cash & Equivalents | $305,804 | $199,123 |
| Long-Term Debt | $150,000 | $150,000 |
| Merchandise Inventory | $1,028,576 | $1,101,525 |
Margins: Net earnings margin improved to 5.1% from 4.8% in the prior year. Cost of goods sold as a percentage of sales decreased slightly to 75.9% from 76.0%.
Material Changes vs. Prior Period
- Sales Growth: Sales increased 10.3% year-over-year, driven by the addition of 88 net new stores and a 3% increase in comparable store sales.
- Profitability: Net earnings rose 18.6% to $79.5 million. Diluted EPS increased 25% to $0.60, aided by a 19% increase in net earnings and a 4% reduction in weighted average diluted shares due to stock repurchases.
- Cash Flow: Operating cash flow turned significantly positive at $160.8 million, compared to a use of $66.0 million in the prior year. This improvement was primarily due to an increase in accounts payable and faster inventory turns.
- Capital Allocation: The company repurchased approximately 2.5 million shares for $77.2 million and paid $12.5 million in dividends.
Outlook, Risks, and Contingencies
- Guidance: Management forecasts approximately $250 million in capital requirements for fiscal year 2008. The effective tax rate is anticipated to remain between 38% and 39%.
- Legal Proceedings: The company is involved in class action lawsuits regarding wage and hour claims (meal/rest breaks and overtime). Management does not expect these to have a material adverse effect on financial condition.
- Investment Portfolio: The company holds $1.9 million in auction-rate securities collateralized by student loans. These are classified as long-term investments due to potential liquidity constraints in the market.
- Risks: Key risks include competitive pressures, changes in consumer spending, supply chain disruptions, and the availability of attractive brand-name merchandise at desirable discounts.
Investor Verification Checklist
- Comparable Store Sales: Verify the sustainability of the 3% comparable store sales growth in a competitive off-price environment.
- Inventory Levels: Monitor merchandise inventory levels ($1.03 billion) relative to sales velocity to assess markdown risks.
- Stock Repurchase Program: Confirm the remaining balance of the $600 million stock repurchase program ($223 million remaining as of May 3, 2008).
- Debt Covenants: Review compliance with interest coverage and leverage ratios on the $150 million senior notes and $600 million revolving credit facility.
- Legal Reserves: Track the $23.4 million reserve for unrecognized tax benefits and potential impacts from pending wage and hour litigation.