Ross Stores, Inc. — Form 10-Q Summary
Period: Fiscal first quarter ended May 3, 2014 (three months; unaudited), compared with the quarter ended May 4, 2013. The request metadata says “2013 Q1,” but the filing itself reports 2014 Q1.
Business and results
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS. At quarter-end it had 1,309 stores: 1,172 Ross and 137 dd’s DISCOUNTS.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Sales | $2.681 billion | $2.540 billion |
| Comparable-store sales growth | 1% | 3% |
| Net earnings | $243.9 million | $234.6 million |
| Diluted EPS | $1.15 | $1.07 |
| Operating cash flow | $504.6 million | $352.9 million |
| Capital expenditures | $148.7 million | $97.6 million |
Sales increased 5.5%, primarily from 82 net new stores and 1% comparable-store growth. Net earnings rose about 4%; diluted EPS rose about 7%, aided by a 3% reduction in weighted-average diluted shares from repurchases. Cost of goods sold was 71.2% of sales versus 70.8%; earnings before taxes were 14.6% versus 14.9%, and net earnings were 9.1% versus 9.2% of sales. SG&A declined to 14.2% of sales from 14.3%.
Financial position and liquidity
- Cash and cash equivalents were $596.0 million at May 3, 2014, up from $423.2 million at February 1, 2014; inventory was $1.251 billion.
- Current assets were $2.063 billion and current liabilities $1.576 billion. Long-term debt was $150 million, comprising fixed-rate notes due in 2018 and 2021.
- The $600 million revolving credit facility was undrawn and available; the company reported covenant compliance. Operating cash flow increased year over year, with management citing higher earnings, accounts-payable leverage, and payment timing.
- Cash used in investing was $143.7 million and cash used in financing was $188.1 million. Financing uses included $138.7 million of repurchases and $42.6 million of dividends paid.
- Contractual obligations totaled $4.625 billion, including $2.315 billion of operating lease obligations and $2.101 billion of purchase obligations.
Outlook, commentary, and risks
Management forecast fiscal 2014 capital expenditures of approximately $800 million, compared with $551 million in fiscal 2013, driven in part by two distribution-center projects and the planned purchase of the New York buying-office building. The $222 million purchase was expected to close by September 20, 2014, subject to conditions; the company planned to finance it. Management expected a fiscal 2014 effective tax rate of approximately 38% and said available cash, operating cash flow, credit lines, and trade credit should meet needs for at least twelve months. No earnings or sales guidance is stated in the filing text.
Management cautioned that sales growth and gross margins may not continue. Risks include retail competition and consumer demand, merchandise availability, supply-chain or systems disruption, execution of store and distribution-center expansion, weather, and economic conditions. Wage-and-hour and other employment class actions remained pending; management did not expect pending litigation to materially adversely affect financial condition, results, or cash flows. Unrecognized tax-benefit reserves were $96.7 million; a possible lapse of limitations could reduce tax expense by up to $6.3 million. The filing also notes restricted assets securing insurance obligations.
Investor verification priorities
- Confirm the reporting period: the filing is for the quarter ended May 3, 2014, despite the “2013 Q1” request metadata.
- Assess whether weaker comparable-store growth and higher cost of goods sold as a share of sales persist.
- Track delivery and funding of the $800 million capital-spending plan, including the New York building purchase and distribution-center projects.
- Review cash conversion and the sustainability of working-capital benefits, including accounts-payable leverage and inventory packaway levels.
- Monitor repurchases, dividends, lease and purchase commitments, tax reserves, and the outcomes of pending litigation.