ROST

Ross Stores, Inc. - 10-Q Filing Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Ross Stores, Inc., an off-price retailer, for the quarterly period ended August 2, 2003. The report covers the three and six months ended on this date. As of the period end, the company operated 553 stores, an increase from 487 stores in the prior year period.

Key Financial Metrics

Margins (as % of Sales):

• Gross Margin: 25.0% (3 months), 25.3% (6 months)
• SG&A: 15.7% (3 months), 16.1% (6 months)
• Net Earnings Margin: 5.7% (3 months), 5.6% (6 months)

Material Changes vs. Prior Period

• Sales Growth: Sales increased 10.1% for the quarter and 8.7% for the six-month period compared to the prior year. This growth was driven primarily by the opening of 23 new stores in the quarter and 46 new stores in the six-month period.
• Comparable Store Sales: Comparable store sales were flat (0%) for the quarter and declined 1% for the six-month period.
• Profitability: Net earnings increased 9.9% for the quarter and 6.7% for the six-month period. Diluted EPS increased 13% and 10% respectively, aided by a reduction in share count due to stock repurchases.
• Cost Structure: Cost of goods sold (COGS) as a percentage of sales increased slightly (75.0% vs 74.9% prior year quarter) due to a reduction in merchandise margins and higher occupancy costs. SG&A as a percentage of sales decreased slightly due to lower benefit and advertising costs.
• Debt: Long-term debt increased to $50 million as the company completed draws on a term loan to finance the new Southern California distribution center.

Outlook, Risks, and Management Commentary

• Strategy: Management plans to address competitive pressures by refining merchandise strategies, diversifying the mix, and strengthening regional offerings. There is no assurance that current strategies will continue to yield revenue growth.
• Capital Allocation: The company repurchased approximately $83.6 million of common stock during the six-month period. A quarterly dividend of $0.0575 per share was declared and paid.
• Expansion: A new 1.3 million square foot distribution center in Perris, California, is expected to be operational in the third quarter of 2003, intended to improve supply chain logistics for the West Coast.
• Risks: Key risks include general economic deterioration, competitive pressures, the ability to secure attractive merchandise at discounts, and the successful opening of the new distribution center. The company notes significant exposure to the California economy, where 33% of stores and corporate headquarters are located.
• Accounting Changes: The company reclassified buying and distribution costs from SG&A to COGS to conform to current presentation. The company also adopted FIN 46 regarding variable interest entities but determined consolidation of its synthetic leases was not required.

Investor Verification Checklist

• Verify the impact of the new Southern California distribution center on logistics costs and productivity once operational in Q3 2003.
• Monitor comparable store sales trends, which were flat or slightly negative, to assess organic growth health independent of store count expansion.
• Review the company's ability to maintain merchandise margins given the noted "sharper pricing strategy" and increased markdowns.
• Confirm the status of the $300 million stock repurchase program, of which approximately $150 million remains to be completed in 2003.
• Assess the company's exposure to California-specific economic downturns or natural disasters given the concentration of assets and stores in the state.