Ross Stores, Inc. — Form 10-Q Summary
Period and context: The filing covers the three months ended May 1, 2021 (first quarter of fiscal 2021), not 2020 Q1 as stated in the request metadata. Ross operates Ross Dress for Less and dd’s DISCOUNTS off-price retail stores. It reported 1,866 stores at quarter-end. Fiscal 2020 comparisons are heavily distorted by store closures during the pandemic; management considers fiscal 2019 a more useful comparison for operating trends.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Q1 FY2019, where provided |
|---|---|---|---|
| Sales | $4.516 billion | $1.843 billion | $3.797 billion |
| Comparable-store sales | Up 13% vs. FY2019 | Not meaningful | Up 2% vs. FY2018 |
| Net earnings (loss) | $476.5 million | $(305.8) million | Net margin 11.1% |
| Diluted EPS | $1.34 | $(0.87) | $1.15 |
| Net cash from (used in) operations | $752.8 million | $(1.058) billion | $509.0 million |
- Sales rose 145.1% year over year, primarily because stores remained open throughout Q1 FY2021, compared with closures for about half of Q1 FY2020. Sales were up 18.9% versus Q1 FY2019, reflecting 13% comparable-store growth and 121 net new stores since that period.
- Gross margin was approximately 29.2% of sales, compared with 28.8% in Q1 FY2019; cost of goods sold was 70.8% of sales. SG&A was 15.0% of sales versus 14.7% in Q1 FY2019. Pre-tax margin was 13.8%, and net margin was 10.6%.
- The effective tax rate was approximately 24%, versus 35% in Q1 FY2020 and 22% in Q1 FY2019. Management attributed the year-over-year decrease mainly to pre-tax earnings changes and the benefit of carrying back projected FY2020 net operating losses.
- Cash and cash equivalents were $5.367 billion at May 1, 2021; total current assets were $7.432 billion and current liabilities were $4.318 billion. Operating cash flow was $752.8 million, capital expenditures were $136.9 million, and financing used $142.8 million. Cash, cash equivalents, and restricted cash totaled $5.427 billion at quarter-end.
- Total debt was approximately $2.514 billion, including $64.9 million current and $2.449 billion long-term. No borrowings or standby letters of credit were outstanding under the $800 million revolving facility, which remained available. Operating lease liabilities totaled approximately $3.142 billion.
- Interest expense, net was $19.0 million, up from $6.7 million in Q1 FY2020, primarily due to senior-note issuance and lower interest income. Total contractual obligations were $12.313 billion, including $4.762 billion of purchase obligations, largely merchandise orders.
Material changes and notable items
- Compared with Q1 FY2020, the return to full store operations drove the rebound in sales, earnings, and operating cash flow; that prior-year quarter included extended COVID-related closures and a substantial net loss.
- Compared with Q1 FY2019, sales increased 18.9%, but net margin declined from 11.1% to 10.6%. Management cited higher interest expense, SG&A, and taxes, partly offset by lower cost of goods sold as a percentage of sales.
- Cost of goods sold as a percentage of sales improved about 35 basis points versus Q1 FY2019. Better merchandise margin and occupancy leverage were partly offset by higher freight, distribution, and buying costs.
- The company resumed its $0.285 quarterly dividend in March 2021; $101.5 million of dividends were paid during the quarter. Subsequent to quarter-end, the board declared another $0.285 dividend payable June 30, 2021.
- On May 19, 2021, after quarter-end, the board authorized a stock repurchase program of up to $1.5 billion through fiscal 2022, with planned purchases of $650 million in FY2021 and $850 million in FY2022. No shares were repurchased under a public program during the reported quarter.
- Q1 FY2020 financing included pandemic-response borrowing and debt issuance; those exceptional financing inflows explain the large difference in financing cash flow between periods.
Outlook, commentary, and risks
- Management was optimistic about the remainder of FY2021, citing recent results, vaccination progress, and easing restrictions, but provided no specific sales or EPS forecast in the filing. Management cautioned that the effects of stimulus payments and other favorable factors may not persist.
- FY2021 capital expenditures were projected at approximately $700 million, funded with available cash. The company planned about 60 new stores in FY2021 and expected to return to its historical pace of approximately 100 annual openings in 2022.
- Management expected higher supply-chain costs, wages, and COVID-related operating expenses to continue. Reported COVID-related operating costs were approximately 35 basis points of sales.
- Key uncertainties include renewed pandemic disruption or virus variants, consumer demand and preferences, supply-chain congestion and freight costs, inventory and markdown management, availability of attractive branded merchandise, competition, labor, cybersecurity, and the company’s ability to sustain liquidity and store growth.
- Management stated that pending class and representative actions, primarily involving California employment and consumer-protection claims, and other currently pending legal proceedings were not expected to have a material adverse effect. The filing also describes tax uncertainties, including up to $10.6 million of unrecognized tax benefits that could decrease within 12 months.
- The interim financial statements were reviewed, not audited, by Deloitte & Touche. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the filing is for Q1 FY2021, ended May 1, 2021, rather than 2020 Q1.
- Assess sales and comparable-store growth against the less-distorted FY2019 baseline, and whether stimulus-driven demand and reopening effects continued.
- Track gross-margin performance against freight, wage, supply-chain, and COVID-related cost pressures.
- Monitor operating cash flow quality, including elevated accounts-payable leverage (152%) and its dependence on extended payment terms and receipt timing.
- Review debt maturities, interest costs, lease obligations, planned capital spending, dividends, and execution of the new buyback authorization.
- Follow pandemic developments, merchandise availability, legal proceedings, and uncertain tax matters for changes in risk or financial impact.