Ross Stores, Inc. — Form 10-Q Summary
Period discrepancy: Request metadata says 2016 Q3, but the filing is for the quarter ended October 28, 2017, with comparisons to October 29, 2016. This summary follows the filing.
Business context and reporting period
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS off-price retail chains. At quarter-end it had 1,627 stores: 1,412 Ross and 215 dd’s DISCOUNTS. The filing covers the three and nine months ended October 28, 2017. Interim financial statements were reviewed, not audited.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales | $3.329 billion | $3.087 billion | $10.067 billion | $9.357 billion |
| Comparable-store sales growth | 4% | 7% | 4% | 4% |
| Net earnings | $274.4 million | $244.5 million | $912.0 million | $817.1 million |
| Diluted EPS | $0.72 | $0.62 | $2.36 | $2.06 |
| Net margin | 8.2% | 7.9% | 9.1% | 8.7% |
Q3 sales increased 7.8% and net earnings increased about 12%; nine-month sales rose 7.6% and net earnings about 11.6%. Growth reflected 92 net new stores opened year over year and 4% comparable-store sales growth. Gross margin, based on cost of goods sold as a percentage of sales, improved about 30 basis points in Q3 and 20 basis points year to date. SG&A as a percentage of sales improved about 35 and 10 basis points, respectively. Management attributed the improvements to merchandise margin, expense leverage, and other cost factors, partly offset by higher freight costs.
For the nine months, operating cash flow was $1.166 billion, versus $1.029 billion; capital expenditures were $266.9 million, versus $220.4 million. Investing cash outflow was $266.0 million and financing cash outflow was $867.1 million. Cash increased $32.6 million to $1.144 billion. Inventory was $1.840 billion at quarter-end. Cash dividends declared were $0.16 per share in Q3.
At October 28, 2017, long-term debt was $396.8 million, consisting of senior notes; cash exceeded reported debt by approximately $747 million. The $600 million revolving facility was undrawn and available, and the company reported covenant compliance. Current assets were $3.236 billion and current liabilities $2.056 billion.
Material changes, outlook, and risks
- Share repurchases totaled $648.8 million for the first nine months, covering 10.5 million shares; dividends paid were $186.5 million. The company expected to repurchase $875 million of stock in fiscal 2017 under its two-year $1.75 billion program.
- Management forecast fiscal 2017 capital expenditures of approximately $390 million and an effective tax rate of 37%–38%. It expected cash, operating cash flow, credit lines, and trade credit to fund operating needs, investments, buybacks, and dividends for at least 12 months. No specific earnings or sales guidance is provided in the supplied filing text.
- Operating lease obligations were substantial: contractual operating-lease rent obligations totaled $2.664 billion, and the New York buying-office ground lease obligations totaled $973.4 million. The company separately estimated approximately $3.6 billion of undiscounted minimum commitments under noncancelable operating leases.
- Approximately $2.5 billion of purchase obligations were outstanding, primarily merchandise orders and other business commitments. The filing also reports pending employment and consumer-protection class actions and other legal proceedings; management did not expect currently pending matters to materially adversely affect financial condition, results, or cash flows.
- Management cited competition, consumer demand and weather, inventory and markdown execution, merchandise availability, supply-chain and information-system disruptions, cybersecurity, store-site availability, legal and tax matters, and liquidity needs among risks. It cautioned that recent sales and margin gains may not continue.
- ASU 2016-09 adoption reduced the nine-month tax provision by $16.1 million through excess stock-compensation tax benefits; the forfeiture-policy change reduced opening retained earnings by $1.1 million. Upcoming revenue guidance was expected to alter the timing of stored-value-card breakage recognition and presentation of sales-return allowances. Lease accounting adoption was expected to materially increase both assets and liabilities, without significant earnings or cash-flow impact.
Important facts for investors to verify
- Confirm the intended reporting year: the request states 2016 Q3, while the filing reports Q3 2017.
- Track comparable-store sales, gross-margin and freight trends, and the contribution from new stores.
- Assess inventory levels, packaway inventory (46% of total inventory at quarter-end), and accounts-payable leverage.
- Review cash allocation and the pace of repurchases against the announced program, alongside planned capital spending and dividends.
- Evaluate lease and purchase commitments, upcoming debt maturities, pending litigation, and the impact of accounting-standard changes.