Ross Stores, Inc. — Form 10-Q Summary
Period clarification: The request identifies “2019 Q3,” but the supplied filing is for the quarter ended October 31, 2020, with comparisons to the quarter ended November 2, 2019. This summary covers the 2020 filing.
Business context and reporting period
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS off-price retail chains. At October 31, 2020, it had 1,869 stores. Store closures related to COVID-19 began March 20, 2020; phased reopenings began May 14, and the vast majority of stores and all distribution centers were operating by the end of June.
Key financial metrics
| Metric | Three months ended Oct. 31, 2020 | Three months ended Nov. 2, 2019 | Nine months ended Oct. 31, 2020 | Nine months ended Nov. 2, 2019 |
|---|---|---|---|---|
| Sales | $3,754.5 million | $3,849.1 million | $8,281.9 million | $11,625.6 million |
| Comparable-store sales | Down 3% | Up 5% | Not meaningful | Up 3% |
| Net earnings (loss) | $131.2 million | $370.9 million | $(152.6) million | $1,204.8 million |
| Diluted EPS | $0.37 | $1.03 | $(0.43) | $3.32 |
| Cost of goods sold as % of sales | 72.2% | 71.9% | 80.7% | 71.5% |
| SG&A as % of sales | 23.4% | 15.7% | 21.9% | 15.1% |
- Cash flow: Nine-month operating cash flow was $1,783.1 million, versus $1,410.9 million a year earlier. Investing cash outflow was $339.5 million; financing cash inflow was $1,696.9 million. Cash, cash equivalents and restricted cash increased $3,140.4 million.
- Liquidity: Cash and cash equivalents were $4,416.1 million at October 31, 2020. Management reported more than $5.2 billion of liquidity, including $800 million available under the revolving credit facility.
- Debt and leases: Long-term debt was $2,512.0 million, compared with $312.9 million at February 1, 2020. Operating lease liabilities totaled $3,262.3 million. The $800 million revolver borrowing drawn in March was repaid in October; the facility remained available and undrawn.
- Margins and unusual expense: The filing reports pre-tax income of $136.5 million for the quarter and a nine-month pre-tax loss of $276.6 million. A roughly $239.8 million debt-extinguishment loss was recorded in connection with October debt tender offers and refinancing.
Material changes versus the prior comparable period
- Third-quarter sales declined 2.5% and comparable-store sales fell 3%; management said sales improved substantially from the second quarter as assortments, store hours, and back-to-school timing improved. Nine-month sales fell 28.8%, primarily reflecting store closures and weaker demand.
- Third-quarter net earnings and diluted EPS fell from $370.9 million and $1.03 to $131.2 million and $0.37. Nine-month results shifted from $1,204.8 million of net earnings to a $152.6 million net loss.
- Quarterly cost of goods sold rose 35 basis points as a share of sales, despite improved merchandise margin, due to higher freight, distribution, buying, and occupancy costs. SG&A rose sharply, including the refinancing charge and COVID-related costs.
- Cash from operations increased, driven largely by lower inventory receipts and higher accounts payable, including extended payment terms. Accounts payable were 149% of inventory at quarter end, compared with 68% a year earlier.
- The company issued $2.0 billion of senior notes in April and $1.0 billion in October, while tendering approximately $775 million principal amount of higher-coupon notes. It repaid its revolver and terminated an undrawn $500 million facility.
Outlook, risks and contingencies
- Management expected material adverse effects from COVID-19 through the remainder of fiscal 2020 and potentially beyond, citing uncertain consumer demand, possible renewed closures, and potential disruption to stores, distribution centers, staffing, and supply chains. The filing provides no clear earnings or comparable-sales guidance.
- Fiscal 2020 capital expenditures were projected at approximately $420 million, reduced from the original plan of approximately $730 million. Management said existing cash, the bank facility, and trade credit were adequate for operating, investing, and financing needs for at least 12 months.
- The company suspended quarterly dividends in May and its stock repurchase program in March, with no additional repurchases planned for the remainder of fiscal 2020. Rent deferrals were primarily expected to be repaid in fiscal 2021.
- Key risks include further COVID-related closures and restrictions, weaker consumer spending, inventory imbalances and markdowns, supply-chain disruption, and higher operating costs. Management warned that estimates are more challenging under the pandemic’s uncertainty.
- Class and representative actions, mainly involving California employment and consumer-protection claims, remained pending. Management did not expect pending litigation or other proceedings to have a material adverse effect. The filing also discloses unrecognized tax benefits and ongoing state tax audits.
- The independent accountant performed a review, not an audit, of the interim financial information and reported no material modifications needed for GAAP conformity. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q3 2020, not Q3 2019.
- Assess whether the $1.8 billion operating cash flow is sustainable, given its reliance on accounts payable leverage and inventory management.
- Review the debt tender and refinancing economics, including the approximately $240 million extinguishment loss, cash costs, and expected interest savings.
- Track subsequent COVID-related store restrictions, consumer demand, comparable sales, inventory markdowns, and operating costs.
- Monitor the timing of rent-deferral repayments, planned capital expenditures, and any resumption of dividends or share repurchases.