Business context and reporting period
Ross Stores, Inc. operates Ross Dress for Less and dd’s DISCOUNTS off-price retail chains. This Form 10-Q covers the three months ended April 28, 2012, compared with the three months ended April 30, 2011. The request metadata says “2011 Q1,” but the filing itself reports fiscal 2012 Q1.
At quarter-end, the company operated 1,146 stores: 1,051 Ross and 95 dd’s DISCOUNTS. The interim financial statements are unaudited; the independent accountant conducted a review, not an audit.
Financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Sales | $2,356.8 | $2,074.6 |
| Comparable-store sales growth | 9% | 3% |
| Earnings before taxes | $337.7 | $281.7 |
| Net earnings | $208.6 | $173.0 |
| Diluted EPS | $0.93 | $0.74 |
| Cost of goods sold / sales | 71.3% | 71.4% |
| SG&A / sales | 14.3% | 14.9% |
| Net margin | 8.9% | 8.3% |
Sales rose 13.6%, reflecting 78 net stores added year over year and 9% comparable-store growth. Net earnings increased about 21% and diluted EPS 26%; management attributed the EPS increase to higher earnings and a 4% reduction in average diluted shares, largely from repurchases. Gross margin improved about 15 basis points: merchandise margin rose 35 basis points, partly offset by higher distribution, freight, and buying costs; occupancy improved about 20 basis points. SG&A leverage improved about 55 basis points.
Cash flow, balance sheet, and capital
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Operating cash flow | $297.3 | $41.1 |
| Investing cash flow | ($71.2) | ($68.3) |
| Financing cash flow | ($134.8) | ($135.7) |
| Capital expenditures | $58.0 | $70.1 |
| Cash at quarter-end | $741.1 | $671.0 |
Operating cash flow improved primarily because of accounts-payable leverage: inventory net of related payables provided approximately $96 million of cash, versus using approximately $85 million in the prior-year quarter. Packaway inventory fell to 45% of total inventory from 49% at fiscal year-end.
At April 28, 2012, total assets were $3,457.5 million, inventory $1,134.7 million, current liabilities $1,370.6 million, and stockholders’ equity $1,610.6 million. Long-term debt was $150 million, comprising $85 million of 6.38% notes due 2018 and $65 million of 6.53% notes due 2021. The $600 million revolving facility was undrawn and available; the company reported covenant compliance. Restricted cash, cash equivalents, and investments totaled $80.1 million, principally collateral for insurance obligations.
Q1 financing included $110.6 million of common-stock repurchases and $31.7 million of dividends paid. The board declared a $0.14-per-share dividend in May, payable June 29, 2012. The filing reports no dividend declared per share in the quarter; the cash paid related to an earlier declaration.
Outlook, risks, and contingencies
- Fiscal 2012 capital expenditures were forecast at $480–490 million, increased from the prior forecast mainly for distribution-network capacity. Management expected to fund investment, repurchases, and dividends with available cash and operating cash flow.
- Management anticipated an approximately 38% fiscal 2012 effective tax rate. The filing provides no specific sales or earnings guidance.
- Management said current cash, operating cash flow, bank facilities, and trade credit should cover operating needs and planned investment, repurchases, and dividends for at least 12 months. It cautioned that sales growth and recent gross margins may not continue.
- Contractual obligations totaled approximately $4.04 billion, including $2.03 billion of rent obligations and $1.72 billion of purchase obligations, primarily merchandise orders. These commitments are not equivalent to funded debt.
- A synthetic lease for a distribution center expires in July 2013. A residual-value guarantee could require payments of up to $56 million; the company had accrued approximately $4.6 million for an estimated shortfall.
- Unrecognized tax benefits, including related interest, were $53.0 million. A statute-of-limitations lapse could reduce the tax provision by up to $1.1 million in the next 12 months. Management did not expect current 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 materially adversely affect financial condition, results, or cash flows.
- Key risks include competition, consumer demand and economic conditions, weather, availability and cost of desirable merchandise, supply-chain disruption, real estate availability, execution of store growth and systems initiatives, and managing inventory, markdowns, shrink, and labor costs. Management 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 reporting-period mismatch in the request metadata: the filing is for Q1 2012, not Q1 2011.
- Assess whether the sharp operating-cash-flow increase is sustainable, given its substantial contribution from accounts-payable leverage and inventory timing.
- Track comparable-store sales, gross-margin components, and whether the 9% comparable-store growth and margin improvements persist.
- Monitor the planned $480–490 million capital program, distribution investments, and their returns.
- Review repurchase pace and remaining authorization; the filing reported $339.4 million remaining under the stated program.
- Follow the distribution-center synthetic-lease resolution, tax positions, and pending litigation for changes in estimated exposure.