Ross Stores, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended April 29, 2017, compared with the three months ended April 30, 2016. The filing’s stated period differs from the request metadata (“2016 Q1”). Ross Dress for Less and dd’s DISCOUNTS operated 1,561 stores at quarter-end. Interim statements were reviewed, not audited.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Sales | $3,306.4 million | $3,089.0 million |
| Comparable-store sales growth | 3% | 2% |
| Gross margin | 29.5% | 29.5% |
| SG&A as % of sales | 14.3% | 14.1% |
| Earnings before taxes | $498.5 million; 15.1% of sales | $471.5 million; 15.3% of sales |
| Net earnings | $321.0 million; 9.7% of sales | $290.6 million; 9.4% of sales |
| Diluted EPS | $0.82 | $0.73 |
| Operating cash flow | $520.8 million | $469.1 million |
| Capital expenditures | $76.0 million | $79.7 million |
Sales increased 7.0%, supported by 88 net additional stores year over year and 3% comparable-store growth. Net earnings rose about 10.5%; diluted EPS increased about 12.3%, also benefiting from a 2% decline in weighted-average diluted shares due to repurchases. Gross margin was flat: improved merchandise margins and distribution and occupancy costs were offset by higher freight expense. SG&A rose about 20 basis points of sales, mainly due to higher wages.
Cash, liquidity, and debt
- Cash and cash equivalents were $1,244.2 million at April 29, 2017, up from $1,111.6 million at fiscal year-end and $910.0 million a year earlier. Operating cash flow less capital expenditures was approximately $444.9 million.
- Cash used in financing was $312.2 million, including $215.0 million of share repurchases and $62.8 million of dividends paid. The company repurchased 3.3 million shares under its program and acquired another 0.6 million treasury shares, primarily for employee tax withholding.
- Long-term debt was $396.6 million, consisting of $400 million principal in senior notes, net of unamortized discounts and issuance costs. Cash exceeded reported debt by approximately $847.6 million. No borrowings or standby letters of credit were drawn against the $600 million revolving facility; the company reported covenant compliance.
- Current assets were $3,064.7 million and current liabilities were $1,937.7 million. Merchandise inventory was $1,594.8 million; packaway inventory was 46% of total inventory.
Outlook, risks, and notable items
- Management forecast approximately $400 million in fiscal 2017 capital expenditures, funded with cash and operating cash flow, and an effective tax rate of 37%–38%. It stated available cash, operating cash flow, credit lines, and trade credit should meet needs for at least the next 12 months; no specific sales or earnings guidance was provided.
- A new accounting standard for stock-based compensation produced $13.2 million of excess tax benefits that reduced Q1 tax expense. Management attributed the lower effective tax rate (approximately 36%, versus 38% a year earlier) and part of the net earnings improvement to this adoption. Prior-year results were not adjusted. A related forfeiture-policy change reduced opening retained earnings by $1.1 million, net of tax.
- Operating lease commitments were substantial: the filing cited approximately $3.5 billion of undiscounted minimum commitments under noncancelable leases. Adoption of the new lease standard was expected to materially increase balance-sheet assets and liabilities, with no significant expected effect on earnings or cash flows.
- Contractual obligations totaled $6.36 billion, including $2.56 billion of operating leases, $2.33 billion of purchase obligations, and $400 million principal on senior notes. Purchase obligations are primarily merchandise orders and other operating commitments.
- Pending class actions primarily concern California wage-and-hour and consumer-protection claims. Management did not expect pending litigation or other proceedings to have a material adverse effect. Unrecognized tax benefits were $103.2 million; management said possible resolutions or statute expirations could reduce the balance and tax provision by up to $3.1 million over the next 12 months.
- Key stated risks include intense retail competition, consumer demand and weather variability, inventory and merchandise sourcing, freight and supply-chain disruption, cybersecurity and information systems, new-store execution, legal or tax outcomes, and the need to maintain liquidity while funding growth, repurchases, and dividends.
Important facts for investors to verify
- Confirm the reporting-year label: the filing covers the quarter ended April 29, 2017, despite the request metadata specifying 2016 Q1.
- Assess how much earnings growth reflects ongoing operations versus the $13.2 million stock-compensation tax benefit, and whether the anticipated full-year tax rate remains 37%–38%.
- Track freight costs, wage-related SG&A, comparable-store sales, inventory levels and packaway mix, and the company’s ability to sustain margins.
- Review the pace and returns of store expansion, the $400 million capital expenditure plan, the $1.75 billion repurchase authorization through fiscal 2018, and dividend funding.
- Evaluate lease and purchase commitments, upcoming note maturities, tax reserves, and developments in pending litigation.