ROST

Ross Stores, Inc. - 10-Q Filing Summary

Business Context and Reporting Period

This Quarterly Report on Form 10-Q covers the three and nine-month periods ended November 1, 2008. Ross Stores, Inc. operates as the second-largest off-price apparel and home goods retailer in the United States, operating under the banners "Ross Dress for Less" and "dd's DISCOUNTS." As of the period end, the company operated 963 stores (906 Ross and 57 dd's DISCOUNTS) across 27 states and Guam.

Key Financial Metrics

Margins (Nine Months Ended Nov 1, 2008):

• Cost of Goods Sold: 76.5% of sales
• Selling, General & Administrative: 16.4% of sales
• Net Earnings Margin: 4.4% of sales

Material Changes vs. Prior Period

• Sales Growth: Sales increased 5.9% for the quarter and 9.9% for the nine-month period compared to the prior year. This growth was primarily driven by the addition of 70 net new stores opened between November 2007 and November 2008.
• Comparable Store Sales: Comparable store sales were flat (0%) for the quarter but increased 3% for the nine-month period.
• Profitability: Net earnings increased 18% for the quarter and 25% for the nine-month period. Diluted EPS rose 22% and 30% respectively, aided by a reduction in share count due to stock repurchases.
• Margin Expansion: Cost of goods sold as a percentage of sales decreased by 130 basis points (quarter) and 105 basis points (nine months), driven by improved merchandise gross margins and lower inventory shortages.
• Cash Flow: Net cash provided by operating activities surged to $368.8 million for the nine months ended Nov 1, 2008, compared to $132.4 million in the prior year, largely due to increased accounts payable leverage from faster inventory turns.

Guidance, Outlook, and Risks

Capital Requirements: The company forecasts approximately $225 million in capital requirements for fiscal year 2008 to fund new store openings, distribution center investments, and IT systems. These are expected to be funded by operating cash flows and existing credit facilities.

Dividends: The Board declared a quarterly cash dividend of $0.095 per share in November 2008, payable January 2, 2009.

Stock Repurchases: Under a $600 million program announced in January 2008, the company repurchased 7.0 million shares for approximately $231.4 million during the nine-month period. Approximately $69 million remained available for repurchase as of November 1, 2008.

Risks and Contingencies:

• Legal Proceedings: The company is involved in class action lawsuits regarding wage and hour claims (meal/rest breaks, unpaid overtime). Management does not expect a material adverse effect on financial condition.
• Investment Portfolio: The company holds investments with unrealized losses of $2.99 million. Management monitors these for "other than temporary" impairment.
• Economic Sensitivity: Results are subject to consumer spending trends, competitive pressures, and supply chain disruptions.

Investor Verification Checklist

• Comparable Store Sales: Verify the sustainability of the 3% nine-month comparable store sales growth given the flat quarter performance.
• Inventory Levels: Review the $1.09 billion inventory balance against sales velocity to ensure no future write-downs are required.
• Capital Expenditure Execution: Confirm the ability to fund the projected $225 million in capex while maintaining liquidity and dividend payments.
• Legal Reserves: Monitor the status of pending wage and hour litigation and the adequacy of current reserves.
• Investment Valuation: Assess the fair value of the investment portfolio, particularly auction-rate and mortgage-backed securities, for potential impairment charges.