Ross Stores, Inc. 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Ross Stores, Inc., covering the three and nine-month periods ended October 28, 2006. Ross is 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 798 stores (772 Ross and 26 dd's DISCOUNTS) across 27 states and Guam.
Key Financial Metrics
| Metric ($000s) | 3 Months Ended Oct 28, 2006 | 9 Months Ended Oct 28, 2006 |
|---|---|---|
| Sales | $1,362,045 | $3,961,773 |
| Net Earnings | $43,933 | $148,527 |
| Diluted EPS | $0.31 | $1.04 |
| Operating Cash Flow (9mo) | $330,249 | |
| Cash & Equivalents (End of Period) | $122,069 | |
| Debt | No long-term debt outstanding; $50M term debt repaid in March 2006. | |
| Working Capital | $253.1 million |
Margins (9 Months): Net earnings margin was 3.7% of sales. Cost of goods sold (COGS) was 77.9% of sales, and Selling, General, and Administrative (SG&A) expenses were 16.0% of sales.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 10.1% for the quarter and 12.1% for the nine-month period compared to the prior year. This growth was driven by 63 net new stores and comparable store sales increases of 4% (quarter) and 5% (nine months).
- Profitability: Net earnings rose 21% for the quarter and 15% for the nine-month period. Diluted EPS increased from $0.25 to $0.31 (quarter) and $0.87 to $1.04 (nine months), aided by share repurchases reducing the share count.
- Accounting Changes: The company adopted SFAS No. 123(R) for stock-based compensation in fiscal 2006. This reduced earnings before taxes by approximately $10.0 million for the nine-month period. Additionally, certain compensation expenses were reclassified from SG&A to COGS.
- Capital Expenditures: Investing cash outflows increased significantly to $192.4 million (nine months) compared to $71.9 million in the prior year, largely due to an $87.3 million cash purchase of the Fort Mill, South Carolina distribution center.
Guidance, Outlook, and Risks
- Capital Expenditures: Management forecasts approximately $235.0 million in capital expenditures for fiscal 2006, reduced by $30.0 million from previous estimates due to timing changes.
- Debt Financing: In October 2006, the company entered into a Note Purchase Agreement for $150.0 million in unsecured senior notes (Series A and B), with funding expected in December 2006. Interest rates are 6.38% and 6.53% respectively.
- Expansion: The company announced an agreement to acquire leasehold rights to 46 former Albertsons sites in six states, expected to contribute to earnings in fiscal 2007.
- Risks: Key risks include competitive pressures, consumer spending trends, supply chain disruptions, and the impact of higher fuel costs on freight. The company is also subject to wage and hour litigation, including a certified class action in California regarding assistant store manager classification.
Investor Verification Checklist
- Debt Issuance: Verify the closing and terms of the $150 million senior notes issuance expected in December 2006.
- Real Estate Acquisition: Confirm the integration and financial impact of the 46 Albertsons leasehold sites for the 2007 expansion program.
- Inventory Levels: Monitor merchandise inventory levels ($1.06 billion) relative to sales velocity to assess potential markdown risks.
- Legal Proceedings: Track the status of the California class action lawsuit regarding assistant store manager classification and potential liability.
- Capital Allocation: Review the balance between capital expenditures ($235M forecast) and share repurchases ($147.7M in nine months) to ensure liquidity remains adequate.