Ross Stores, Inc. 10-K Summary (Fiscal Year Ended Feb 3, 2007)
Business Context and Reporting Period
Ross Stores, Inc. operates two off-price retail chains: Ross Dress for Less (771 locations) and dd's DISCOUNTS (26 locations). The company targets value-conscious consumers with first-quality, name-brand apparel and home accessories at discounts of 20% to 70% off regular prices. This report covers the fiscal year ended February 3, 2007 (Fiscal 2006), which was a 53-week period.
Key Financial Metrics
| Metric | Fiscal 2006 | Fiscal 2005 |
|---|---|---|
| Sales | $5,570.2 million | $4,944.2 million |
| Net Earnings | $241.6 million | $199.6 million |
| Diluted EPS | $1.70 | $1.36 |
| Gross Margin | 22.5% | 22.1% |
| Operating Cash Flow | $506.9 million | $375.2 million |
| Long-Term Debt | $150.0 million | $0 |
| Cash & Equivalents | $367.4 million | $191.8 million |
| Working Capital | $431.7 million | $349.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 12.7% year-over-year, driven by the opening of 63 net new stores and a 4% increase in comparable store sales.
- Profitability: Net earnings rose 21% to $241.6 million. Gross margin improved by 40 basis points due to lower markdowns and shortage rates, partially offset by higher freight costs.
- Capital Structure: The company issued $150 million in unsecured senior notes in October 2006 (Series A and B) and repaid a $50 million term debt in March 2006. Long-term debt as a percent of total capitalization rose to 14% from 0%.
- Accounting Changes: Adoption of SFAS No. 123(R) for stock-based compensation reduced pre-tax earnings by approximately $13.2 million. Reclassifications moved certain compensation costs from SG&A to Cost of Goods Sold.
- Store Count: Total stores increased from 734 to 797.
Guidance, Outlook, and Risks
- Capital Expenditures: The company forecasts approximately $290 million in capital requirements for 2007 to fund new store openings, renovations, and distribution center expansions.
- Expansion Strategy: Plans to incorporate approximately 40 former Albertsons sites into the 2007 expansion program. Continued investment in distribution capacity, specifically the Moreno Valley facility.
- Dividends: Quarterly cash dividend increased to $0.075 per share in January 2007.
- Risks: Key risks include competitive pressures, changes in consumer spending, supply chain disruptions, and the availability of attractive brand-name merchandise. The company faces potential litigation regarding employee classification and wage/hour claims, though management does not expect a material adverse effect.
- Tax Outlook: Effective tax rate expected to remain in the 38% to 40% range for fiscal 2007.
Investor Verification Checklist
- Verify the sustainability of the 4% comparable store sales growth in a competitive off-price environment.
- Monitor the impact of the new $150 million senior notes on future interest expense and leverage ratios.
- Assess the execution of the Albertsons real estate acquisition and the timeline for converting these sites into profitable Ross locations.
- Review the effectiveness of new merchandising systems in improving local inventory allocation and gross margins.
- Track freight cost trends and their impact on the cost of goods sold, given the company's reliance on opportunistic purchasing.