Ross Stores, Inc. - Q1 2004 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended May 1, 2004. Ross Stores, Inc. is the second-largest off-price apparel retailer in the United States, operating 599 stores across 25 states and Guam as of the period end. The company is executing a strategy of steady store expansion and recently introduced a new concept, dd's DISCOUNTS, targeting lower-income households.
Key Financial Metrics
| Metric ($000s) | Q1 2004 | Q1 2003 |
|---|---|---|
| Sales | $991,892 | $879,284 |
| Net Earnings | $48,518 | $49,309 |
| Earnings Per Share (Diluted) | $0.32 | $0.32 |
| Operating Cash Flow | $62,940 | $11,561 |
| Cash and Equivalents | $184,951 | $116,544 |
| Long-Term Debt | $50,000 | $50,000 |
| Working Capital | $406,066 | $338,799 |
Margins: Net earnings margin was 4.9% (down from 5.6% prior year). Cost of goods sold (COGS) increased to 75.7% of sales (from 74.3%). Selling, general, and administrative (SG&A) expenses decreased to 16.3% of sales (from 16.5%).
Material Changes vs. Prior Period
- Sales Growth: Total sales increased 13% year-over-year, driven by the opening of 31 new stores and a 3% increase in comparable store sales.
- Profitability Pressure: Net earnings declined slightly despite sales growth due to a 140 basis point increase in COGS. This was primarily caused by distribution costs related to a partial roof collapse at the Fort Mill, SC distribution center, and ramp-up expenses for new facilities in Carlisle, PA, and Perris, CA.
- Capital Allocation: The company significantly increased share repurchases, buying back approximately 2.0 million shares for $59.0 million (compared to $40.7 million in the prior year). Dividends paid increased to $6.4 million.
- Liquidity: Operating cash flow improved dramatically to $62.9 million, aided by increased leverage on accounts payable.
Guidance, Outlook, and Risks
- System Implementation Issues: The company installed a new Core Merchandising System in April 2004. Start-up delays have caused inventory imbalances, which management expects to adversely impact sales and margins in the near term. Remediation is expected in Q2 2004.
- Asset Valuation Risk: The company is evaluating the potential sale or repurposing of its Newark, CA headquarters and distribution center. Due to a depressed commercial real estate market, a significant write-down of the facility's net book value (approx. $35 million) may be required.
- Expansion Goals: Management plans to grow to over 1,000 stores by fiscal 2008 and generate over $7 billion in annual revenue. Capital expenditures for fiscal 2004 are forecast at approximately $135 million.
- Debt Facilities: In March 2004, the company secured a new $600 million revolving credit facility (expiring March 2009) with no borrowings outstanding as of May 1, 2004.
Investor Verification Checklist
- Verify the timeline and financial impact of the new Core Merchandising System implementation on Q2 2004 results.
- Monitor the valuation process and potential impairment charge for the Newark, CA facility.
- Track the resolution of inventory imbalances and their effect on gross margins in the upcoming quarter.
- Confirm the progress of the dd's DISCOUNTS rollout and its impact on overall sales mix.
- Review the company's ability to maintain interest coverage and leverage ratios under its new $600 million credit facility and synthetic lease obligations.