Ross Stores, Inc. — Form 10-Q Summary
Reporting period: Three months ended May 4, 2013, compared with the three months ended April 28, 2012. The request metadata labels this “2012 Q1,” but the filing is for fiscal 2013 Q1.
Business context and results
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. At quarter-end, it operated 1,227 stores: 1,112 Ross and 115 dd’s DISCOUNTS.
| Metric | Q1 2013 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $2,539.9 million | $2,356.8 million | +7.8% |
| Comparable-store sales growth | 3% | 9% | Slower growth |
| Net earnings | $234.6 million | $208.6 million | +12% |
| Diluted EPS | $1.07 | $0.93 | +15% |
| Operating cash flow | $352.9 million | $297.3 million | +$55.5 million |
| Capital expenditures | $97.6 million | $58.0 million | +$39.6 million |
Margins, cash flow, debt and liquidity
- Cost of goods sold was 70.8% of sales, down from 71.3%; management cited improved merchandise margin, freight and distribution, partly offset by higher buying and occupancy costs. SG&A was 14.3% of sales, roughly flat year over year.
- Pretax margin increased to 14.9% from 14.3%; net margin rose to 9.2% from 8.9%. The effective tax rate was approximately 38% in both periods.
- Operating cash flow was $352.9 million. Investing activities used $109.7 million and financing activities used $175.7 million; cash increased $67.4 million to $714.2 million. Operating cash flow less capital expenditures was approximately $255.3 million.
- Cash and cash equivalents were $714.2 million at May 4, 2013. Long-term debt was $150 million, consisting of senior notes; there were no revolver borrowings or letters of credit under the facility. The $600 million revolving credit facility remained available, and the company reported covenant compliance.
- Current assets were $2.15 billion and current liabilities $1.47 billion. Inventory was $1.23 billion; accounts payable was $859.6 million. The filing reports $81.0 million of restricted cash, cash equivalents and investments, unavailable without secured parties’ consent.
Changes, outlook and risks
- Sales growth decelerated from 13.6% to 7.8%, and comparable-store growth from 9% to 3%. Revenue gains reflected 81 net new stores since the prior-year comparison and comparable-store growth; 28 stores opened during the quarter.
- Capital spending increased, and the company forecast approximately $670 million of fiscal 2013 capital expenditures, including investments in distribution centers, a data center and headquarters relocation. It expected to fund these plans with cash and operating cash flows.
- Management anticipated an approximately 38% fiscal 2013 tax rate and stated existing cash, operating cash flow, credit lines and trade credit should meet operating and planned capital needs, repurchases and dividends for at least 12 months. No specific sales or earnings guidance was provided in the filing.
- The board approved a two-year, $1.1 billion share repurchase program for fiscal 2013–2014. The company repurchased 2.3 million shares for $138.3 million during the quarter and paid $37.5 million in dividends.
- Risks include retail competition and consumer demand, merchandise availability, supply-chain or systems disruptions, execution of store and distribution-center expansion, and economic or weather conditions. Management said pending employment class actions and other proceedings were not expected to have a material adverse effect. Unrecognized tax benefits were $87.6 million; up to $2.1 million could reduce tax expense if certain statutes of limitation lapse.
- The interim financial statements were reviewed by Deloitte & Touche, not audited. Management said disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the period designation: this filing covers Q1 fiscal 2013, despite the request metadata’s “2012 Q1” label.
- Track comparable-store sales and margins against the prior-year growth rates, and assess whether the reported cost improvements persist.
- Monitor execution and funding of the $670 million capital-spending plan, including distribution-center and headquarters projects.
- Review the pace of repurchases and dividends alongside cash generation, lease and purchase commitments, and the $150 million senior-note obligations.
- Follow pending litigation, tax audits and unrecognized tax benefits; the filing does not quantify a likely litigation loss.