Ross Stores, Inc. — Form 10-Q Summary
Period clarification: The filing covers the quarter and nine months ended October 29, 2022, not 2021 Q3 as indicated in the request metadata. Unless noted otherwise, amounts are in millions.
Business context and reporting period
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. At October 29, 2022, it operated 2,019 stores: 1,696 Ross and 323 dd’s DISCOUNTS. The company opened 99 stores net during the first nine months of fiscal 2022.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $4,565.5 | $4,574.5 | $13,481.6 | $13,895.6 |
| Net earnings | $342.0 | $385.0 | $1,065.0 | $1,355.8 |
| Diluted EPS | $1.00 | $1.09 | $3.08 | $3.82 |
| Cost of goods sold as % of sales | 75.0% | 72.7% | 74.3% | 71.5% |
| SG&A as % of sales | 15.2% | 15.9% | 15.1% | 15.2% |
| Net earnings as % of sales | 7.5% | 8.4% | 7.9% | 9.8% |
Comparable store sales declined 3% in Q3 and 5% for the nine-month period. Operating cash flow was $472.7 million, versus $1,503.7 million in the prior-year period; capital expenditures were $417.9 million, and financing used $1,070.4 million. Cash, cash equivalents and restricted cash ended the period at $3,966.7 million, including $3,906.5 million of unrestricted cash.
Long-term debt was $2,455.5 million. The company had no borrowings or standby letters of credit outstanding under its $1.3 billion revolving facility and was in compliance with its leverage covenant. Inventory was $2,494.0 million, up from $2,231.2 million at October 30, 2021; packaway inventory was 41% of total inventory, versus 31% a year earlier.
Material changes versus the prior comparable period
- Sales fell 0.2% in Q3 and 3.0% for the first nine months; comparable sales declines were partly offset by 95 net new stores compared with the prior-year period.
- Net earnings declined 11% in Q3 and 21% year to date. Diluted EPS fell 8% and 19%, respectively; lower weighted-average share counts from repurchases partly offset earnings declines.
- Gross-margin pressure drove cost of goods sold higher as a share of sales: 230 basis points in Q3 and 280 basis points year to date. Drivers included markdowns, distribution costs, freight and occupancy deleverage. Lower incentive compensation reduced SG&A as a share of sales.
- Operating cash flow declined substantially, reflecting lower earnings, payment of prior-year incentive bonuses, and reduced accounts-payable leverage. Cash declined by approximately $1.0 billion from the beginning of the period, largely reflecting repurchases, dividends and capital spending.
Outlook, risks and contingencies
- Management expected unfavorable packaway-cost timing and higher markdowns to pressure margins through fiscal Q4, and expected fiscal 2022 operating costs to continue reflecting higher wages and inflation.
- Fiscal 2022 capital expenditures were projected at approximately $700 million. The company expected to fund them with available cash. It also expected to repurchase $950 million of stock in fiscal 2022 under its two-year, $1.9 billion repurchase authorization through fiscal 2023; $718.7 million was repurchased in the first nine months.
- Management stated cash, operating cash flows, the credit facility and trade credit were expected to meet operating needs and fund planned investments, repurchases and dividends for at least 12 months. A $0.31-per-share dividend was declared in November 2022, payable December 30, 2022.
- Key uncertainties include inflation, rising interest rates, recession concerns, the Russia-Ukraine conflict, COVID-19 developments, consumer demand, markdowns and inventory management, supply-chain disruption and freight costs, competition, weather, labor, cybersecurity, and legal or regulatory matters.
- Class and representative employment and consumer-protection lawsuits and other proceedings were pending. Management did not expect their resolution to materially adversely affect the company. Tax audits were ongoing; management did not expect a material financial-statement impact. Unrecognized tax benefits were $70.7 million, and up to $10.0 million could decrease in the next 12 months.
- The interim statements were unaudited; Deloitte’s review reported no material modifications needed for GAAP conformity. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm that the intended filing period is Q3 2022, since the request metadata says 2021 Q3.
- Track comparable sales, customer demand, markdown levels and gross-margin trends against management’s stated Q4 pressure expectations.
- Monitor inventory and packaway levels, distribution and freight costs, and the effect of these items on operating cash flow.
- Check progress against the fiscal 2022 capital-spending and share-repurchase expectations, and the remaining repurchase authorization.
- Review cash use, debt maturities, lease commitments and the availability and covenant terms of the revolving credit facility.