Ross Stores, Inc. — Form 10-Q Summary
Period: The filing reports the three months ended May 5, 2018, compared with the three months ended April 29, 2017. The request metadata labels the period “2017 Q1,” which conflicts with the filing’s reporting period.
Business context and results
Ross operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. At quarter-end it had 1,651 stores, including 1,432 Ross and 219 dd’s DISCOUNTS locations. It opened 29 stores during the quarter and had 90 more stores than a year earlier.
| Metric | Three months ended May 5, 2018 | Comparable 2017 period |
|---|---|---|
| Sales | $3,588.6 million | $3,306.4 million |
| Sales growth | 8.5%; comparable-store sales up 3% | Sales growth 7.0%; comparable-store sales up 3% |
| Net earnings | $418.3 million | $321.0 million |
| Diluted EPS | $1.11 | $0.82 |
| Operating cash flow | $472.1 million | $520.9 million |
Financial position and cash flows
- Cost of goods sold was 70.3% of sales versus 70.5%; gross margin therefore was 29.7% versus 29.5%. Management attributed the improvement to merchandise margin, distribution and occupancy costs, partly offset by higher freight and buying expenses.
- SG&A was 14.6% of sales versus 14.3%, primarily reflecting higher wage-related costs. Net margin rose to 11.7% from 9.7%; the lower tax rate was the primary reason.
- Cash and cash equivalents were $1.303 billion at May 5, 2018. Including restricted cash, cash, cash equivalents and restricted cash totaled $1.365 billion. Inventory was $1.895 billion, up from $1.642 billion at February 3, 2018; packaway inventory was 49% of total inventory.
- Quarterly investing cash outflow was $79.3 million, principally capital expenditures of $79.8 million. Financing cash outflow was $380.9 million, including $255.4 million of share repurchases and $85.4 million of dividends paid. Cash, cash equivalents and restricted cash increased $11.9 million.
- Total debt was $397.1 million, including $85.0 million due in December 2018; no borrowings or standby letters of credit were outstanding under the $600 million revolving facility. The facility and senior-note covenants were in compliance.
- Current assets were $3.454 billion and current liabilities $2.107 billion. Contractual obligations totaled $6.986 billion, including $2.807 billion of operating lease payments and $2.732 billion of purchase obligations.
Changes, outlook, and risks
- Net earnings increased 30%, and diluted EPS increased 35%. Management said EPS growth reflected higher net earnings, including tax-rate benefits, and a 4% contribution from lower weighted-average diluted shares due to repurchases. The quarter’s diluted EPS included a $0.17 per-share benefit from recently enacted tax legislation.
- The effective tax rate was 23%, versus 36% a year earlier; management cited the reduction in the federal corporate tax rate and estimated a 24%–25% effective tax rate for fiscal 2018. The company had recorded an $80.1 million provisional tax benefit in fiscal 2017 and had not adjusted it by May 5, 2018.
- Management forecast approximately $475 million in fiscal 2018 capital expenditures. It said available cash, operating cash flows, credit lines and trade credit were expected to meet operating and planned funding needs for at least the next twelve months.
- Operating cash flow declined year over year, primarily due to higher packaway purchases and inventory timing. Management noted that packaway levels vary with merchandise opportunities and seasonality, and that margins may not continue at the quarter’s level.
- ASC 606 adoption increased opening retained earnings by $20 million, primarily from changed timing of stored-value-card breakage recognition; its impact on the quarter was not material. Adoption of lease accounting in fiscal 2019 was expected to materially increase balance-sheet assets and liabilities; the company cited approximately $3.8 billion of undiscounted minimum operating-lease commitments.
- Pending class-action employment and consumer-protection lawsuits and other legal matters were disclosed; management did not expect currently pending matters to materially adversely affect financial condition, results or cash flows. Tax reserves for unrecognized benefits were $125.6 million; up to $8.6 million could decrease over the next twelve months.
- Key stated risks include retail competition and consumer demand, inventory and markdown management, merchandise availability, freight and supply-chain disruption, cybersecurity and information systems, store-site availability, legal and tax matters, and maintaining liquidity while funding growth and shareholder returns.
Important facts for investors to verify
- Confirm the intended period: the filing is for Q1 fiscal 2018, not 2017 Q1.
- Assess whether comparable-store sales growth and margins can persist, particularly given higher freight, buying and wage costs.
- Track inventory growth, packaway levels, and the effect of inventory timing on operating cash flow.
- Review the $85 million note maturity in December 2018, lease commitments, and the anticipated fiscal 2019 lease-accounting balance-sheet impact.
- Monitor the fiscal 2018 tax-rate outlook and any revisions to provisional Tax Act accounting or tax reserves.
- Compare planned capital spending and share repurchases with cash generation and the stated liquidity outlook.