Ross Stores, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2012, ended July 28, 2012, compared with periods ended July 30, 2011. The request metadata says “2011 Q2,” but the filing itself reports fiscal 2012 Q2.
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 had 1,174 stores: 1,072 Ross locations and 102 dd’s DISCOUNTS locations. The company opened 51 stores and closed two during the first half.
| Metric | Three months | Six months |
|---|---|---|
| Sales | $2,340.9 million, up 12.0% | $4,697.7 million, up 12.8% |
| Comparable-store sales growth | 7% | 8% |
| Net earnings | $182.0 million, up 22.8% | $390.6 million, up 21.6% |
| Diluted EPS | $0.81, versus $0.64 | $1.74, versus $1.38 |
| Gross margin | 27.9%, versus 27.1% | 28.3%, versus 27.8% |
| SG&A as a percentage of sales | 15.1%, versus 15.4% | 14.7%, versus 15.1% |
| Net earnings as a percentage of sales | 7.8%, versus 7.1% | 8.3%, versus 7.7% |
Gross-margin improvement reflected better merchandise margins and lower distribution and occupancy costs, partly offset by higher buying and freight costs. SG&A dollars increased with store growth, while SG&A as a percentage of sales declined on sales leverage. The effective tax rate was approximately 39% for the quarter and 38% for the first half, compared with 39% for both prior-year periods.
Cash flow, liquidity, and capital
- First-half operating cash flow was $504.2 million, versus $161.7 million. Management attributed the increase primarily to higher accounts-payable leverage; inventory net of accounts payable provided approximately $67 million of cash, versus a $135 million use a year earlier.
- Investing cash outflow was $156.8 million, including $152.1 million of capital expenditures. Financing cash outflow was $276.2 million, including $223.7 million of share repurchases and $63.3 million of dividends paid.
- Cash and cash equivalents were $721.0 million at July 28, 2012, up from $649.8 million at January 28, 2012. Merchandise inventory was $1,219.1 million; current assets were $2,118.0 million and current liabilities $1,415.1 million.
- Debt comprised $150 million of unsecured senior notes: $85 million due in 2018 at 6.38% and $65 million due in 2021 at 6.53%. The company had no borrowings under its amended $600 million revolving facility, which expires in June 2017, and reported compliance with debt covenants.
- The board authorized a two-year, $900 million repurchase program for fiscal 2011 and 2012. First-half repurchases totaled 3.7 million shares for $223.7 million. The quarterly dividend declared increased to $0.14 per share from $0.11; another $0.14 dividend was declared in August 2012.
Outlook, risks, and contingencies
- Management forecast fiscal 2012 capital expenditures of $465–$475 million, funded with available cash and operating cash flow, and expected cash, operating flows, credit lines, and trade credit to cover operating needs, planned investment, buybacks, and dividends for at least 12 months.
- Management anticipated a fiscal 2012 effective tax rate of approximately 38%. The filing does not provide specific sales or earnings guidance.
- Contractual obligations totaled approximately $4.08 billion, including $2.08 billion of operating rent obligations and $1.72 billion of purchase obligations. These include $1.51 billion of merchandise purchase orders due in less than one year.
- A synthetic lease for the Perris, California distribution center expires in July 2013. If the property is sold to a third party for less than $70 million, the company has a residual-value guarantee of up to $56 million.
- Unrecognized tax benefits, net of federal tax benefits, were $55.2 million, including $11.4 million of related interest. Up to $1.1 million could reduce the tax provision if tax positions lapse within the next 12 months. Management did not expect ongoing state tax audits to materially affect the statements.
- Employment-related class actions and other ordinary-course legal proceedings were pending; management did not expect their resolution to have a material adverse effect. Key business risks include competition, consumer demand and macroeconomic conditions, merchandise availability, supply-chain disruptions, weather, store-site availability, and execution of growth and margin strategies.
Most important facts for investors to verify
- Whether comparable-store sales growth and improved gross margins persist, given management’s caution that current growth and margins may not continue.
- Whether operating cash flow remains strong as inventory, vendor-payment timing, and packaway levels change.
- Progress against the $465–$475 million fiscal 2012 capital-spending plan and the economics of planned store expansion.
- Use of remaining authorization under the $900 million repurchase program, and the effects of repurchases and dividends on cash and share count.
- Resolution and potential cash impact of legal proceedings, tax reserves, and the 2013 distribution-center lease guarantee.
The interim financial statements were reviewed by the independent accountant, not audited; the auditor reported no material modifications that should be made based on its review.