Ross Stores, Inc. — Form 10-Q Summary
Period clarification: The request identifies “2019 Q1,” but the supplied filing is for the three months ended May 2, 2020, compared with the three months ended May 4, 2019. This summary covers the period in the filing.
Business context and reporting period
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS. At May 2, 2020, it had 1,832 stores. Due to COVID-19, all stores, distribution centers, buying offices, and corporate offices were temporarily closed beginning March 20 and remained closed through quarter-end. The company reported that phased store reopenings began May 14; as of the filing date, 1,465 Ross and 258 dd’s DISCOUNTS stores had reopened. The interim financial statements are unaudited and were reviewed by Deloitte & Touche.
Financial results and key metrics
| Metric | Three months ended May 2, 2020 | Three months ended May 4, 2019 |
|---|---|---|
| Sales | $1.843 billion | $3.797 billion |
| Sales change | Down 51.5% | Up 5.8% |
| Cost of goods sold | $1.890 billion | $2.702 billion |
| SG&A | $415.3 million | $558.3 million |
| Operating result | Operating loss not separately stated; total costs and expenses were $2.312 billion | Operating income not separately stated; total costs and expenses were $3.254 billion |
| Net income (loss) | $(305.8) million | $421.1 million |
| Net margin | (16.6)% | 11.1% |
| Diluted EPS | $(0.87) | $1.15 |
| Cash flow from operations | $(1.058) billion | $509.0 million |
| Capital expenditures | $139.7 million | $95.6 million |
Cost of goods sold included a $313 million inventory valuation charge for inventory expected to sell below original cost. The filing does not separately state gross profit or operating income in the presented results; cost of goods sold exceeded sales in the quarter, and management reported a net loss.
At May 2, 2020, cash and cash equivalents were $2.670 billion (plus $60.8 million of restricted cash). Short-term debt was $805 million and long-term debt was $2.286 billion. Current assets were $4.588 billion and current liabilities were $2.624 billion. Management reported more than $3.0 billion of liquidity, including unrestricted cash and the undrawn $500 million 364-day facility.
Material changes and drivers
- Sales fell 51.5% year over year, primarily because stores were closed for roughly half the quarter. Comparable-store sales were not provided because stores were open for less than seven weeks.
- The $313 million inventory charge and expected additional markdowns weighed on margins; management said aged and seasonal inventory would require aggressive price reductions.
- Operating cash flow swung from $509.0 million provided to $1.058 billion used. Management cited the net loss, merchandise payments for receipts preceding the shutdown, and lower accounts-payable leverage.
- Financing cash flow was $2.517 billion provided, mainly from the $2.0 billion April bond offering and the $800 million revolver draw. The company also entered a new $500 million 364-day revolving facility, undrawn at quarter-end.
- Reported store count increased to 1,832 from 1,745 a year earlier. The company reduced planned fiscal 2020 openings and expected no second-quarter openings.
Outlook, risks, and other notable items
- Management could not forecast the full pandemic impact and expected material adverse effects on results, financial position, and cash flows through the remainder of fiscal 2020 and potentially beyond. It cited uncertainty in reopening pace, customer demand, consumer behavior, and possible renewed closures.
- Management expected most aged and seasonal inventory to sell through by the end of the second fiscal quarter, but cautioned that the $313 million charge did not capture all anticipated markdown effects. The ultimate margin impact depends on sell-through.
- Fiscal 2020 capital expenditure expectations were reduced to approximately $420 million from an original plan of approximately $730 million.
- The company suspended share repurchases in March and quarterly dividends in May. It also reduced expenses, inventory receipts, and planned capital spending, and implemented temporary furloughs and salary reductions.
- The $800 million revolver amendment temporarily suspended the debt-to-EBITDAR covenant for the second and third fiscal quarters and introduced a temporary minimum-liquidity requirement through April 2021. The company reported covenant compliance at quarter-end. The new $500 million facility also restricts stock repurchases and certain post-draw cash balances.
- Other risks include higher operating costs for health and safety measures, supply-chain disruption, weak consumer spending, inventory markdowns and shortage, and damage or disruption associated with demonstrations. Management stated pending litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q1 fiscal 2020, not Q1 2019.
- Track reopening progress, store productivity, customer demand, and any renewed closures or restrictions.
- Compare actual inventory sell-through and markdowns with management’s estimates, including whether further charges are required.
- Monitor operating cash generation, liquidity, debt service, covenant compliance, and the terms and availability of credit facilities.
- Verify subsequent capital spending, store-opening plans, and the timing or conditions for any resumption of dividends or repurchases.