Ross Stores, Inc. - Form 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Ross Stores, Inc., covering the three-month period ended April 30, 2005. Ross is the second-largest off-price apparel and home goods retailer in the United States, operating 673 stores (663 Ross Dress for Less and 10 dd's DISCOUNTS) as of the period end. The company operates in 26 states and Guam.
Key Financial Metrics
| Metric | Q1 2005 | Q1 2004 (Restated) |
|---|---|---|
| Sales | $1,123.9 million | $991.9 million |
| Net Earnings | $50.1 million | $48.1 million |
| Diluted EPS | $0.34 | $0.31 |
| Operating Cash Flow | $95.2 million | $72.0 million |
| Cost of Goods Sold (as % of Sales) | 76.4% | 75.7% |
| Net Margin | 4.5% | 4.9% |
| Cash and Equivalents | $144.4 million | $185.0 million |
| Long-Term Debt | $50.0 million | $50.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 13% year-over-year, driven by the opening of 74 new stores since the prior year and a 3% increase in comparable store sales.
- Margin Compression: Net earnings margin decreased from 4.9% to 4.5%. Cost of goods sold as a percentage of sales increased by 75 basis points, primarily due to higher distribution/logistics costs and increased markdowns.
- Store Count: The company opened 24 new stores during the quarter, bringing the total to 673.
- Restatement: Prior year financial statements (ended May 1, 2004) were restated to conform to SEC guidance on operating lease accounting (tenant improvement allowances and rent holidays). This adjustment reduced prior year net earnings by $0.4 million.
Guidance, Outlook, and Risks
- Capital Expenditures: Management forecasts approximately $185 million in capital expenditures for fiscal 2005 to fund new store openings, remodels, and distribution center investments.
- Dividends: A quarterly cash dividend of $0.05 per share was declared in May 2005, payable in July 2005.
- Stock Repurchases: The company repurchased approximately 1.5 million shares for $42.6 million during the quarter. Approximately $132 million remains available under the current repurchase program.
- Subsequent Event: On May 20, 2005, the company acquired a warehouse in Moreno Valley, California, for $38.3 million using existing cash balances.
- Risks: Key risks include the ability to secure attractive merchandise at discounts, integration of new supply chain systems, migration of the data center, and exposure to the California economy (29% of stores and headquarters are located there).
Investor Verification Checklist
- Restatement Impact: Verify the specific adjustments made to the 2004 comparative period regarding lease accounting and their effect on year-over-year growth calculations.
- Markdown Pressure: Assess the sustainability of the 30 basis point increase in merchandise cost of goods sold due to higher markdowns.
- Inventory Levels: Review the increase in merchandise inventory to $964.7 million and the associated cash outflow of $111.6 million for inventory purchases.
- Synthetic Lease Obligations: Examine the $141.4 million in "Other synthetic lease obligations" and the residual value guarantees associated with distribution centers.
- Comparable Store Sales: Confirm the 3% comparable store sales growth rate in the context of broader retail industry trends.