Ross Stores, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three months ended May 2, 2015, compared with the three months ended May 3, 2014. The request metadata says “2014 Q1,” but the filing itself reports fiscal 2015 first-quarter results.
Business context and financial results
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS. At quarter-end, it had 1,399 stores: 1,242 Ross and 157 dd’s DISCOUNTS.
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Sales | $2.938 billion | $2.681 billion |
| Sales growth | 9.6% | 5.5% |
| Comparable-store sales growth | 5% | 1% |
| Gross margin | 29.6% | 28.8% |
| SG&A as a percent of sales | 13.9% | 14.2% |
| Earnings before taxes | $459.4 million | $392.7 million |
| Net earnings | $282.2 million | $243.9 million |
| Diluted EPS | $1.37 | $1.15 |
| Operating cash flow | $414.0 million | $504.6 million |
Financial position, cash flow, and capital allocation
- Cash and cash equivalents were $761.4 million at May 2, 2015, versus $696.6 million at January 31, 2015. Merchandise inventory was $1.504 billion, up from $1.373 billion at fiscal year-end.
- Long-term debt was $395.7 million, consisting of senior notes; there were no borrowings under the $600 million revolving credit facility. The facility remained available, and the company reported compliance with debt covenants.
- Cash used in investing was $107.1 million, including $106.9 million of capital expenditures. Cash used in financing was $242.2 million, including $175.8 million of share repurchases and $48.7 million of dividends paid. Cash increased by $64.7 million during the quarter.
- The company approved a new two-year, $1.4 billion share repurchase program for fiscal 2015 and 2016. It declared a $0.235-per-share dividend and approved a two-for-one stock split, scheduled for June 11, 2015.
Material changes and management commentary
- Sales increased through 90 net new stores opened between the comparable periods and 5% comparable-store growth. The company opened 37 stores and closed none during the quarter.
- Cost of goods sold fell to 70.4% of sales from 71.2%, reflecting improved merchandise margin and occupancy leverage, plus lower distribution costs from the timing of packaway costs; higher freight costs partly offset these benefits. SG&A leverage reflected comparable-store growth.
- Management said diluted EPS included an estimated $0.04 benefit, mainly from favorable timing of packaway-related costs, which it expected to reverse in subsequent quarters of fiscal 2015.
- Operating cash flow declined year over year, primarily because of increased packaway inventory from opportunistic merchandise purchases, partly offset by higher earnings. Packaway was 45% of inventory at quarter-end, unchanged from fiscal year-end.
Outlook, risks, and contingencies
- Management anticipated a 37%–38% effective tax rate for fiscal 2015 and forecast approximately $450 million in fiscal-year capital expenditures. It said cash, operating cash flow, available credit, and trade credit should meet operating and planned financing needs for at least the next 12 months.
- Management cautioned that current sales growth and gross margins may not continue. Risks include competition, consumer demand and preferences, merchandise availability, inventory and markdown management, labor costs, supply-chain or systems disruptions, cybersecurity, expansion execution, and economic conditions.
- Pending wage-and-hour class actions and other legal and regulatory matters were described as not expected by management to have a material adverse effect. Unrecognized tax benefits were $108.1 million; up to $3.6 million could be released within 12 months if statutes of limitations lapse.
- The company early adopted a standard that reclassified debt issuance costs as a deduction from debt; it did not affect earnings, retained earnings, or cash flows. Interim results are unaudited and not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether comparable-store growth and gross-margin improvement persist after the timing-related packaway benefit reverses.
- How inventory and packaway levels affect cash generation and future markdowns.
- Execution of the $450 million capital plan, store expansion, and the $1.4 billion repurchase program while maintaining liquidity.
- Developments in employment litigation, tax audits, and the $108.1 million unrecognized-tax-benefit balance.
- Confirm the intended period: the supplied filing is for Q1 fiscal 2015, not Q1 2014.