Business context and reporting period
Ross Stores, Inc. operates Ross Dress for Less and dd’s DISCOUNTS off-price retail chains. This unaudited Form 10-Q covers the three and nine months ended October 31, 2015, compared with periods ended November 1, 2014. The request metadata says “2014 Q3,” but the filing itself is for fiscal 2015 Q3. The interim statements were reviewed by Deloitte & Touche, not audited.
At quarter-end, Ross had 1,276 stores and dd’s DISCOUNTS had 172, for 1,448 stores total, up 82 net stores year over year. Share and per-share figures reflect the June 2015 two-for-one stock split.
Financial performance and position
| Metric | Three months | Nine months |
|---|---|---|
| Sales | $2,782.9 million, up 7.1% | $8,689.3 million, up 8.5% |
| Comparable-store sales growth | 3%, versus 4% | 4%, versus 2% |
| Earnings before taxes | $331.7 million; 11.9% of sales | $1,203.0 million; 13.9% of sales |
| Net earnings | $215.7 million, up 11.9%; 7.7% of sales | $756.5 million, up 11.9%; 8.7% of sales |
| Diluted EPS | $0.53, versus $0.46 | $1.85, versus $1.61 |
Cost of goods sold was 72.0% of sales for the quarter and 71.2% for the nine-month period, improving 40 and 40 basis points, respectively, from the prior-year periods. SG&A was 15.9% and 14.8% of sales, up 10 basis points and unchanged, respectively. Management attributed the quarter’s lower cost ratio primarily to improved merchandise margin, partly offset by distribution expense; higher wages pressured SG&A.
For the nine months, operating cash flow was $762.0 million, down from $982.0 million. Investing cash outflow was $285.8 million, including $285.6 million in capital expenditures; financing cash outflow was $687.2 million. Cash declined $210.9 million to $485.7 million. Inventory rose to $1,700.8 million from $1,495.0 million a year earlier. Management cited higher packaway receipts and payment timing as major reasons for weaker operating cash flow; packaway was 48% of inventory versus 42% a year earlier.
At October 31, 2015, long-term debt was $395.9 million, consisting of senior notes; there were no revolver borrowings or standby letters of credit under the $600 million revolving facility, available through June 2017. The company reported compliance with debt covenants. Current assets were $2,434.6 million and current liabilities $1,749.5 million. Restricted cash, cash equivalents, and investments totaled $75.9 million and were not freely available.
Material changes and capital allocation
- Sales growth reflected 82 net new stores and positive comparable-store sales. The company opened 90 stores and closed four during the nine months.
- Net interest expense increased to $8.1 million for the nine months from $0.6 million, primarily reflecting the 2024 notes issued in 2014 and less capitalized interest.
- Repurchases of common stock were $530.3 million for the nine months, versus $418.5 million; dividends paid were $144.8 million, versus $126.8 million. The company repurchased 10.4 million shares and had $869.7 million remaining under its two-year $1.4 billion repurchase authorization at quarter-end.
- Capital expenditures were lower than the prior year, mainly because 2014 included the purchase of the New York buying office.
Outlook, risks, and contingencies
Management forecast fiscal 2015 capital expenditures of approximately $375 million, down from its prior $400 million forecast due mainly to project timing, and expected a 37%–38% effective tax rate. It said cash, operating cash flow, credit lines, and trade credit should be adequate for operating needs and planned investment, repurchases, and dividends for at least 12 months. No specific sales or earnings forecast is provided in the filing. The board declared a $0.1175-per-share dividend in November, payable December 31, 2015.
Management cautioned that sales growth and current gross margins may not continue. Risks include intense retail competition, changes in consumer demand, merchandise availability and inventory management, wage and other operating costs, weather, supply-chain or systems disruption, cybersecurity, expansion execution, and legal, regulatory, and tax matters. The company disclosed pending wage-and-hour and consumer-protection class actions, primarily in California, and other proceedings; management did not expect their resolution to materially adversely affect financial condition, results, or cash flows. Unrecognized tax benefits were $103.4 million; up to $10.1 million could reduce tax expense within 12 months if matters conclude or statutes expire.
Contractual obligations totaled $5.9 billion, including $2.45 billion of operating leases, $1.93 billion of purchase obligations, and $400 million principal of senior notes. The purchase obligations primarily relate to merchandise orders and other operating commitments. The company 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 intended reporting period: the filing is for Q3 2015, despite the request metadata indicating 2014 Q3.
- Track packaway inventory, accounts-payable leverage (62% at quarter-end versus 76% a year earlier), and operating cash flow conversion.
- Assess whether comparable-store growth and improved merchandise margins persist, while monitoring wage, freight, and distribution costs.
- Review the pace of buybacks and dividends against cash balances, planned capital expenditures, lease commitments, and purchase obligations.
- Monitor pending litigation and tax matters, and the company’s ability to maintain covenant compliance and liquidity.