Ross Stores, Inc. — Form 10-Q Summary
Period discrepancy: The request metadata says 2018 Q3, but the filing is for the quarter ended November 2, 2019 (fiscal 2019 Q3), compared with the quarter ended November 3, 2018. The nine-month comparisons are for those respective periods.
Business context
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. At quarter-end it had 1,810 stores: 1,550 Ross and 260 dd’s DISCOUNTS. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance
- Quarter revenue: $3.849 billion, up 8.4% year over year; comparable-store sales rose 5% versus 3% a year earlier. Management attributed growth to 90 net new stores and higher comparable sales.
- Nine-month revenue: $11.626 billion, up 6.9%; comparable-store sales increased 3%, matching the prior-year period.
- Quarter earnings: Earnings before taxes were $482.5 million versus $443.7 million; net earnings were $370.9 million versus $338.1 million. Diluted EPS was $1.03 versus $0.91.
- Nine-month earnings: Earnings before taxes were $1.574 billion versus $1.504 billion; net earnings were $1.205 billion versus $1.146 billion. Diluted EPS was $3.32 versus $3.06.
- Margins: Cost of goods sold was 71.9% of sales for the quarter versus 71.8%; nine-month cost of goods sold was 71.5% versus 71.1%. Earnings before taxes were 12.5% of sales for the quarter in both years, and 13.5% for nine months versus 13.8%. Net margin was 9.6% for the quarter versus 9.5%, and 10.4% for nine months versus 10.5%.
- Cash flow, nine months: Operating cash flow was $1.411 billion versus $1.450 billion. Investing used $400.7 million versus $292.6 million, principally reflecting higher capital spending. Financing used $1.285 billion versus $1.099 billion. Cash, cash equivalents and restricted cash fell by $274.6 million to $1.204 billion.
- Liquidity and debt: At November 2, cash and cash equivalents were $1.143 billion; inventory was $2.169 billion. Long-term debt was $312.8 million, comprising $65 million of 6.53% notes due 2021 and $250 million of 3.375% notes due 2024 (principal amounts). The company had no borrowings or letters of credit outstanding under its $800 million revolving facility, available through July 2024, and reported compliance with covenants.
- Capital returns: Nine-month common-stock repurchases were $965.9 million and dividends paid were $278.4 million. The board approved a $2.55 billion, two-year repurchase program in March 2019. A $0.255-per-share dividend declared in November was payable December 31, 2019.
Changes, outlook and risks
- Quarter sales growth accelerated to 8.4% from 6.6%, and comparable-store growth improved to 5% from 3%. Nine-month sales growth slowed to 6.9% from 8.0%, while comparable-store growth remained 3%.
- Distribution expense pressured cost of goods sold: it rose 45 basis points as a share of sales for the quarter and 30 basis points for nine months. For nine months, higher freight and occupancy costs also weighed on the ratio; improved merchandise margin partly offset these pressures.
- Management forecast approximately $580 million of fiscal 2019 capital expenditures and an approximately 23% fiscal-year effective tax rate. It said cash, operating cash flow, credit lines and trade credit should cover operating needs and planned investment, debt repayment, repurchases and dividends for at least the next 12 months. No specific earnings or sales guidance is provided in the filing text.
- A state tax resolution after quarter-end was expected to produce an approximately $10 million tax benefit and reduce unrecognized tax benefits by approximately $16.2 million in the quarter ending February 1, 2020.
- The company adopted lease accounting standard ASC 842 on February 3, 2019. It recognized lease assets and liabilities; at November 2, operating lease liabilities totaled $3.161 billion, including $559.4 million current. Adoption reduced opening retained earnings by $19.6 million and did not significantly affect earnings or cash flows. Prior-period balance sheets were not restated, limiting direct comparability.
- Management cited competitive pressure, consumer demand and weather, inventory and markdown execution, merchandise availability, supply-chain and information-system disruptions, tariffs and trade policy, store-site availability, and legal or tax outcomes among risks. It said pending litigation was not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Confirm the intended period: the supplied filing covers 2019 Q3, not 2018 Q3.
- Assess whether inventory growth and the timing of merchandise receipts and vendor payments may continue to affect operating cash flow; inventory was $2.169 billion versus $1.979 billion a year earlier.
- Track distribution and freight costs, merchandise margins, and comparable-store sales for evidence of sustained profitability.
- Consider lease obligations alongside reported debt: operating lease liabilities were $3.161 billion, with additional minimum payments for leases signed but not yet commenced.
- Monitor execution of the $580 million capital-spending plan, the repurchase program, and dividend commitments, as well as the anticipated tax benefit and unresolved tax and legal matters.