Ross Stores, Inc. — Form 10-Q Summary
Reporting-period note: The request identifies 2010 Q3, but this filing reports the quarter ended October 29, 2011, and the nine months then ended; the comparable periods ended October 30, 2010. The interim statements are unaudited and were reviewed by Deloitte & Touche.
Business context and results
Ross operated Ross Dress for Less and dd’s DISCOUNTS, with 1,126 stores at quarter-end (1,038 Ross and 88 dd’s). Sales growth reflected new stores and higher comparable-store sales.
| Metric | Three months ended Oct. 29, 2011 | Three months ended Oct. 30, 2010 | Nine months ended Oct. 29, 2011 | Nine months ended Oct. 30, 2010 |
|---|---|---|---|---|
| Sales | $2,046.4 million | $1,874.3 million | $6,210.4 million | $5,720.9 million |
| Sales growth | 9.2% | 7.5% | 8.6% | 9.9% |
| Comparable-store sales growth | 5% | 3% | 5% | 6% |
| Net earnings | $144.0 million | $121.4 million | $465.2 million | $393.0 million |
| Diluted EPS | $1.26 | $1.02 | $4.03 | $3.26 |
| Net margin | 7.0% | 6.5% | 7.5% | 6.9% |
For the quarter, cost of goods sold was 72.8% of sales and SG&A was 16.2%; pretax margin was 10.8%. For the nine months, those figures were 72.4%, 15.5%, and 12.0%, respectively. Gross margin, calculated as sales less cost of goods sold, was 27.2% for the quarter and 27.6% for the nine months.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $413.7 million, versus $426.8 million a year earlier. Investing used $286.9 million and financing used $407.8 million; cash declined $281.0 million to $552.9 million.
- Capital expenditures were $231.3 million, up from $149.7 million. Management attributed weaker operating cash flow mainly to working capital used for additional packaway inventory. Inventory increased to $1,233.6 million from $1,048.1 million at October 30, 2010.
- At October 29, 2011, current assets were $1,958.1 million and current liabilities $1,269.1 million. The balance sheet reported $150 million of long-term debt, consisting of senior notes; no borrowings or letters of credit were outstanding under the $600 million revolving facility. The company reported covenant compliance.
- Cash and cash equivalents were $552.9 million; additionally, $66.6 million of cash and investments was held in restricted accounts for insurance obligations. Management said cash, operating cash flow, credit lines, and trade credit were adequate for at least the next 12 months.
Changes, outlook, and notable items
- Quarterly sales rose 9.2% and diluted EPS rose 24%. The filing attributes sales gains to 69 net new stores over the comparable year and 5% comparable-store growth. Lower markdowns, faster inventory turns, and expense leverage supported margins; higher distribution and freight costs partly offset those gains.
- Nine-month diluted EPS increased 24%, supported by higher net earnings and a 4% reduction in diluted weighted-average shares, largely from stock repurchases. The company repurchased $342.7 million of common stock during the nine months and paid $77.0 million in dividends.
- Fiscal 2011 capital expenditure forecast: approximately $375 million to $425 million. Management anticipated an effective tax rate of approximately 38% for fiscal 2011. No specific future sales or earnings guidance is provided in the filing.
- After quarter-end, the board approved a two-for-one stock split, payable December 15, 2011, and declared a $0.22-per-share dividend ($0.11 post-split), payable December 30. The split does not affect financial position or results.
- Legal matters include pending California wage-and-hour class actions and other ordinary-course proceedings. Management did not expect their resolution to materially adversely affect financial condition, results, or cash flows. Unrecognized tax benefits were $52.1 million; up to $1.5 million could reduce tax provision if statutes of limitations lapse within the next year.
- Principal disclosed risks include retail competition and consumer demand, merchandise availability, supply-chain disruption, weather and macroeconomic conditions, store expansion and site availability, and execution of merchandising, systems, and cost-management plans. Management cautioned that margins and sales growth may not continue.
Important facts for investors to verify
- Confirm the intended reporting year: the supplied filing is for Q3 2011, not Q3 2010.
- Assess whether comparable-store growth, inventory turns, and markdown trends can be sustained, and monitor packaway inventory and related working-capital needs.
- Track actual capital spending against the $375–$425 million forecast and the pace and returns of store openings and building acquisitions.
- Review cash deployment among repurchases, dividends, restricted insurance collateral, and operating needs; distinguish reported cash from funds that are restricted.
- Monitor the wage-and-hour litigation, tax audits and unrecognized tax benefits, and compliance with debt and lease covenants.