Ross Stores, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2023, ended October 28, 2023; comparable periods ended October 29, 2022. Fiscal 2023 is a 53-week year ending February 3, 2024. Amounts below are U.S. dollars.
Business context
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. At quarter-end, the company had 2,112 stores: 1,765 Ross and 347 dd’s DISCOUNTS. It opened 51 stores in the quarter and 97 in the first nine months.
Financial performance
| Metric | Third quarter | First nine months |
|---|---|---|
| Sales | $4.925 billion, up 7.9%; comparable-store sales up 5% | $14.354 billion, up 6.5%; comparable-store sales up 4% |
| Net earnings | $447.3 million, versus $342.0 million | $1.265 billion, versus $1.065 billion |
| Diluted EPS | $1.33, versus $1.00 | $3.74, versus $3.08 |
| Operating cash flow | Not presented for the quarter | $1.566 billion, versus $472.7 million |
Third-quarter gross margin was approximately 27.6% (cost of goods sold was 72.4% of sales), improving about 260 basis points year over year. SG&A was 16.5% of sales, up 125 basis points. Net margin increased to 9.1% from 7.5%. For the nine months, cost of goods sold was 72.6% of sales and SG&A was 16.5%.
At October 28, cash and cash equivalents were $4.499 billion; merchandise inventory was $2.614 billion. Senior notes totaled approximately $2.460 billion, including $249.6 million due within one year. The $1.3 billion revolving credit facility was undrawn and available, and the company reported covenant compliance. Operating lease liabilities were approximately $3.320 billion.
Changes and drivers
- Sales growth reflected comparable-store gains and 93 net new stores versus the prior-year comparison date.
- Lower ocean and domestic freight costs and occupancy leverage improved cost of goods sold as a share of sales. Higher incentive compensation increased buying costs.
- SG&A rose in dollars and as a percentage of sales, primarily from incentive compensation, higher store wages, and store growth.
- Higher interest income, associated with higher interest rates and the company’s cash balances, was a significant earnings tailwind. Net interest was income of $43.3 million in the quarter and $111.9 million for the nine months, compared with $2.8 million of quarterly interest income and $25.6 million of nine-month net interest expense a year earlier.
- Nine-month operating cash flow increased substantially, aided by higher earnings, incentive-compensation timing, and accounts-payable leverage. Inventory uses of cash were $590.3 million, versus $231.7 million in the prior-year period; accounts payable provided $259.1 million, versus a $453.0 million use.
Liquidity, capital allocation, and outlook
Nine-month capital expenditures were $540.5 million, primarily for distribution-center construction, new stores, and information technology, compared with $417.9 million a year earlier. Fiscal 2023 capital expenditures were projected at approximately $750 million, funded from available cash. The company paid $342.1 million in dividends and repurchased 6.4 million shares for $703.4 million during the nine months. A quarterly dividend of $0.335 per share was declared in November 2023.
Management estimated that cash, operating cash flows, bank credit, and trade credit would be adequate for operating needs and planned investment, repurchases, dividends, and debt service for at least the next 12 months. No specific sales or earnings guidance is provided in the supplied filing text. Management expected lower freight costs and higher incentive compensation and store-wage costs to continue through fiscal 2023.
Risks, contingencies, and unusual items
Management cited persistent inflation and pressure on discretionary spending among low-to-moderate-income customers, as well as macroeconomic and geopolitical uncertainty. Other risks include changing consumer demand, competition, inventory and markdown execution, merchandise availability, freight and supply-chain disruption, weather, labor, cyber or information-system disruptions, and store-site availability. Management stated that pending wage-and-hour class or representative actions and other legal proceedings were not expected to have a material adverse effect; outcomes remain uncertain. Unrecognized tax-benefit reserves were $65.3 million, and the company said they could decrease by up to $12.9 million over the next 12 months.
The interim financial statements were reviewed, not audited, by Deloitte & Touche. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable-store sales and customer spending remain resilient amid inflation and pressure on discretionary budgets.
- Whether gross-margin gains from freight costs persist and offset rising wage and incentive-compensation expenses.
- Inventory growth, packaway levels (39% of inventory at quarter-end), and the effect of inventory and supplier-payment timing on cash flow.
- Execution and returns on the planned $750 million fiscal-year capital program, including distribution-center projects and store openings.
- Cash deployment, the approaching $250 million senior-note maturity, repurchases, and dividend commitments.
- Developments in pending litigation, tax audits, and unrecognized tax benefits.