Ross Stores, Inc. — Form 10-Q summary
Period: The filing covers the three and six months ended August 4, 2018, compared with periods ended July 29, 2017. The request metadata says “2017 Q2,” which does not match the filing period.
Business context and results
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS. At quarter-end, it had 1,680 stores: 1,453 Ross and 227 dd’s DISCOUNTS. The company opened 59 net stores in the first half, including 30 in the second quarter.
| Metric | Three months ended Aug. 4, 2018 | Year-over-year | Six months ended Aug. 4, 2018 | Year-over-year |
|---|---|---|---|---|
| Sales | $3.738 billion | +8.9% | $7.327 billion | +8.7% |
| Comparable-store sales | +5% | Prior year +4% | +4% | Prior year +4% |
| Net earnings | $389.4 million | +$72.9 million | $807.7 million | +$170.1 million |
| Diluted EPS | $1.04 | +27% | $2.15 | +31% |
| Gross margin | 28.7% | Down about 80 bps | 29.2% | Down about 30 bps |
| SG&A as a share of sales | 14.8% | Up about 30 bps | 14.7% | Up about 30 bps |
| Net margin | 10.4% | Prior year 9.2% | 11.0% | Prior year 9.5% |
Cash flow, liquidity and debt
- First-half operating cash flow was $1.014 billion, versus $798.0 million a year earlier. Capital expenditures were $178.6 million; investing cash outflow was $178.1 million.
- Financing cash outflow was $739.8 million, including $528.6 million of common-stock repurchases and $170.0 million of dividends paid. Cash, cash equivalents and restricted cash increased $96.3 million to $1.450 billion; balance-sheet cash and cash equivalents were $1.387 billion.
- Total senior-note debt was approximately $397.2 million: $85 million due December 2018, $65 million due December 2021, and $250 million due September 2024. The company had no borrowings or standby letters of credit under its $600 million revolving facility and was in compliance with debt covenants.
- Current assets were $3.380 billion and current liabilities were $1.978 billion. Inventory was $1.698 billion. Management said cash, operating cash flow, credit lines and trade credit should cover expected needs for at least 12 months.
- Contractual obligations totaled $7.045 billion, including $2.839 billion of operating-lease rent obligations and $2.765 billion of purchase obligations. The filing also reports approximately $3.8 billion of undiscounted minimum operating-lease commitments; these disclosures use different descriptions and should be reviewed in context.
Material changes and management commentary
- Sales growth reflected 91 net new stores since the comparable prior-year period and comparable-store sales growth. Management said it planned to continue store expansion, diversify merchandise and improve regional and local offerings, but cautioned that these strategies may not sustain sales growth or increase earnings.
- Cost of goods sold rose as a percentage of sales. Management cited unfavorable timing of packaway-related distribution costs and higher freight costs; improved merchandise margin and lower occupancy costs partly offset these pressures. SG&A deleverage reflected wage-related costs and the absence of a prior-year legal-cost benefit.
- The federal corporate tax-rate reduction contributed to effective tax rates of 25% for the quarter and 24% for the half, versus 38% and 37%. Diluted EPS included estimated tax-reform benefits of $0.18 for the quarter and $0.35 for the half. Management expected a 24%–25% effective tax rate for fiscal 2018.
- The company forecast approximately $475 million of fiscal 2018 capital expenditures. Its fiscal 2018 stock-repurchase authorization was increased by $200 million to $1.075 billion; $546.4 million remained available at August 4. The August-declared dividend was $0.225 per share, payable September 28, 2018.
- ASC 606 was adopted using the modified retrospective method, increasing opening retained earnings by $20 million, primarily from stored-value-card breakage timing; the reported-period impact was not material. The company was evaluating the upcoming lease-accounting standard and expected a material increase in reported assets and liabilities, but no significant earnings, equity or cash-flow impact.
Risks, contingencies and unusual items
- Management identified risks including intense retail competition, changes in consumer demand and weather, inventory and markdown execution, availability of desirable branded merchandise, supply-chain or IT disruption, cybersecurity, labor costs, store-site availability, product claims, tax or tariff changes, and liquidity needs.
- Class-action litigation, primarily involving wage-and-hour/employment and consumer-protection claims, remained pending. Management did not expect pending litigation and other proceedings to have a material adverse effect, but outcomes remain uncertain.
- Unrecognized tax benefits were $130.8 million, including interest and penalties; up to $8.6 million could decrease in the next 12 months. Tax audits were ongoing, and management did not expect them to materially affect the financial statements. The filing noted no adjustment to the $80.1 million provisional tax-reform benefit recorded in fiscal 2017.
- The interim financial statements were reviewed, not audited. The auditor reported no material modifications it believed were necessary for GAAP conformity.
Investor verification points
- Confirm the intended reporting period: the filing is for Q2 2018, not Q2 2017.
- Assess whether comparable-store sales and new-store growth can continue while gross margin and SG&A rates face cost pressure.
- Review the December 2018 $85 million note maturity, repurchase pace, dividend commitments and remaining liquidity.
- Track lease-standard adoption and its expected material balance-sheet effect, as well as the timing and treatment of lease commitments.
- Monitor tax-rate assumptions, unrecognized tax benefits and pending litigation for changes from management’s current estimates.