Ross Stores, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended August 3, 2019 (fiscal 2019 second quarter), not 2018 Q2 as stated in the request metadata. The interim financial statements are unaudited; Deloitte performed a review, not an audit.
Business context and reporting period
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS off-price retail chains. At quarter-end it had 1,772 stores, up from 1,680 a year earlier, including 1,523 Ross and 249 dd’s DISCOUNTS locations.
Financial performance
| Metric | Three months ended Aug. 3, 2019 | Six months ended Aug. 3, 2019 |
|---|---|---|
| Sales | $3.980 billion; +6.5% year over year | $7.777 billion; +6.1% |
| Comparable-store sales growth | 3%, versus 5% | 2%, versus 4% |
| Net earnings | $412.7 million; +6.0% | $833.9 million; +3.2% |
| Diluted EPS | $1.14, versus $1.04 | $2.29, versus $2.15 |
| Net margin | 10.4%, unchanged | 10.7%, versus 11.0% |
| Cost of goods sold as % of sales | 71.4%, versus 71.3% | 71.3%, versus 70.8% |
| SG&A as % of sales | 14.9%, versus 14.8% | 14.8%, versus 14.7% |
Six-month operating cash flow was $1.083 billion, compared with $1.014 billion. Investing used $249.8 million, primarily capital expenditures of $250.3 million; financing used $868.3 million. Cash, cash equivalents, and restricted cash ended at $1.443 billion. The company reported $1.382 billion of unrestricted cash and cash equivalents on the balance sheet.
At August 3, 2019, long-term debt was $312.7 million, with no current debt due. Ross had no borrowings or standby letters of credit under its new $800 million revolving facility. It reported $3.046 billion in present-value operating lease liabilities, including $549.8 million current. Current assets were $3.516 billion and current liabilities $2.679 billion; the current-liability increase from prior periods chiefly reflects adoption of lease accounting.
Changes versus the comparable period
Sales growth and comparable-store growth slowed from the prior-year periods. Six-month gross margin declined approximately 50 basis points, mainly due to higher distribution, freight, occupancy, and buying costs, partly offset by improved merchandise margin. SG&A as a share of sales rose about five basis points, primarily on higher wages. Higher interest income and fewer weighted-average shares supported EPS growth; share repurchases reduced diluted shares by 3% for the six-month comparison.
Ross adopted ASC 842 leases on February 3, 2019, recognizing approximately $2.9 billion of lease liabilities and right-of-use assets at adoption and recording a $19.6 million reduction to opening retained earnings. Prior-year balance-sheet figures were not restated.
Outlook, commentary, and risks
- Management forecast fiscal 2019 capital expenditures of approximately $600 million, funded from cash and operating cash flow.
- Management expected a fiscal 2019 effective tax rate of 23%–24%; no earnings or sales guidance is provided in this filing.
- Management said cash, operating cash flow, credit lines, and trade credit should meet operating, investment, debt, repurchase, and dividend needs for at least 12 months.
- The Board approved a two-year $2.55 billion repurchase program through fiscal 2020. Ross repurchased 6.6 million shares for $640.3 million during the first half and paid $186.6 million in dividends. An August dividend of $0.255 per share was declared.
- Key stated risks include intense retail competition; changing consumer demand and weather; inventory, markdown, and merchandise-sourcing execution; supply-chain and information-system disruption or cyberattacks; store-site availability; tariffs and trade policy; litigation and tax matters; and the ability to sustain liquidity while investing and returning capital.
- Employment and consumer-protection class actions and other proceedings remained pending. Management did not expect their resolution to materially adversely affect financial condition, results, or cash flows. The company was in compliance with debt covenants.
- Unrecognized tax-benefit reserves were $88.4 million; management said certain state matters could reduce the total by up to $8.6 million over the next 12 months.
Important facts for investors to verify
- Confirm the period: this filing covers fiscal Q2 and the first half of 2019, not 2018.
- Assess whether slower comparable-store growth and higher freight and distribution costs persist, and whether merchandise margins can offset them.
- Track inventory and accounts-payable leverage: packaway was 43% of inventory, and accounts payable equaled 74% of inventory at quarter-end.
- Evaluate the scale and cash demands of lease obligations alongside reported debt, planned capital expenditures, repurchases, and dividends.
- Monitor store expansion, the $2.55 billion repurchase authorization, tax uncertainties, and pending litigation.