Ross Stores, Inc. — Form 10-Q Summary
Period clarification: The request identifies 2013 Q2, but this filing reports the quarter ended August 2, 2014, and the six months then ended. Comparatives are the quarter and six months ended August 3, 2013. Amounts below are in millions unless otherwise stated.
Business context and reporting period
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS off-price retail chains. At August 2, 2014, it had 1,338 stores: 1,194 Ross locations and 144 dd’s DISCOUNTS locations. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and position
| Metric | Three months ended Aug. 2, 2014 | Three months ended Aug. 3, 2013 | Six months ended Aug. 2, 2014 | Six months ended Aug. 3, 2013 |
|---|---|---|---|---|
| Sales | $2,729.6 | $2,551.3 | $5,410.2 | $5,091.2 |
| Sales growth | 7.0% | 9.0% | 6.3% | 8.4% |
| Comparable-store sales growth | 2% | 4% | 2% | 3% |
| Net earnings | $239.6 | $213.1 | $483.5 | $447.7 |
| Diluted EPS | $1.14 | $0.98 | $2.30 | $2.06 |
| Pre-tax margin | 14.3% | 13.6% | 14.5% | 14.2% |
| Net margin | 8.8% | 8.3% | 8.9% | 8.8% |
Cost of goods sold was 71.2% of sales in both 2014 periods; SG&A was 14.5% for the quarter and 14.3% for the half year. Quarterly merchandise-margin gains helped offset higher distribution and occupancy costs. SG&A ratios improved year over year, partly due to expense controls and a favorable legal resolution.
For the six months, operating cash flow was $741.8, investing cash outflow $248.4, and financing cash outflow $366.8; cash increased $126.6 to $549.8. Operating cash flow rose from $532.3 a year earlier, aided by higher earnings and more favorable inventory/payables cash effects. Capital expenditures were $253.4. Inventory was $1,258.8 at August 2, 2014, versus $1,330.5 a year earlier.
At August 2, 2014, total assets were $4,167.8, current liabilities $1,532.1, and stockholders’ equity $2,149.3. Debt consisted of $150.0 of senior notes; the $600.0 revolving credit facility was undrawn and available. The company reported compliance with debt covenants. It had $2,332.1 of operating lease obligations and $2,190.2 of purchase obligations in its contractual-obligations schedule.
Material changes versus the prior comparable period
- Quarterly sales increased 7%, but comparable-store growth slowed to 2% from 4%; half-year sales growth eased to 6.3% from 8.4%.
- Net earnings increased 12% for the quarter and 8% for the half year. Diluted EPS rose to $1.14 and $2.30, respectively, with share repurchases contributing to lower weighted-average diluted shares.
- Quarterly cost of goods sold and SG&A each declined as a percentage of sales; for the half year, cost of goods sold was approximately flat while SG&A improved.
- Operating cash flow increased substantially year over year. Accounts-payable leverage was 77% at August 2, 2014, compared with 71% a year earlier; management noted this measure varies with inventory receipts and payment timing.
- The store base grew by 85 net locations year over year. The company repurchased 4.1 million shares for $277.4 during the six-month period and paid $84.9 in dividends.
Outlook, commentary, risks, and unusual items
- Management forecast fiscal 2014 capital expenditures of approximately $730, down from its prior $800 forecast mainly because distribution-center spending shifted to 2015. The forecast includes the planned $222 purchase of the New York buying-office building, subject to closing conditions; management expected to finance the purchase.
- Management expected a fiscal 2014 effective tax rate of approximately 38% and said cash, operating cash flow, credit lines, and trade credit should meet operating and planned funding needs for at least 12 months.
- Quarterly and half-year diluted EPS each included an estimated one-time benefit of approximately $0.02 from a favorable resolution of a legal matter. Management said pending litigation and other legal proceedings were not expected to materially adversely affect financial condition, results, or cash flows. Employment-related class actions remained pending.
- Key business risks include retail competition and consumer demand, access to attractive branded merchandise, weather, supply-chain or information-system disruptions, store and distribution-center expansion execution, and cybersecurity. Management cautioned that recent sales growth and margins may not continue.
- Unrecognized tax benefits were $101.9; a statute-of-limitations lapse could reduce the tax provision by up to $6.3 over the next twelve months. The company was evaluating the revenue-recognition standard effective for its fiscal 2017 reporting periods.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for Q2 2014, not Q2 2013.
- Assess whether comparable-store growth and sales momentum can improve, and whether store expansion remains profitable.
- Track merchandise margins, occupancy and distribution costs, and the extent to which prior-period earnings benefited from the legal resolution.
- Verify completion and financing of the New York buying-office purchase and the timing of planned capital expenditures.
- Monitor cash generation, inventory and accounts-payable leverage, buybacks, dividend commitments, and the company’s significant lease and purchase obligations.
- Follow pending employment litigation, tax audits and unrecognized tax benefits, and any changes to credit-facility terms or covenant compliance.