Ross Stores, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2013 Q3, but the supplied filing is for the quarter ended November 1, 2014, with comparisons to November 2, 2013. The financial statements are unaudited; the interim information received an independent accountant’s review, not an audit.
Business context and reporting period
Ross operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. At November 1, 2014, it had 1,366 stores: 1,214 Ross and 152 dd’s DISCOUNTS. The filing covers the three and nine months ended November 1, 2014.
Financial performance
| Metric | Three months ended Nov. 1, 2014 | Prior-year quarter | Nine months ended Nov. 1, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Sales | $2,598.8 million | $2,398.1 million | $8,009.0 million | $7,489.3 million |
| Net earnings | $192.7 million | $171.6 million | $676.2 million | $619.4 million |
| Diluted EPS | $0.93 | $0.80 | $3.22 | $2.86 |
| Net margin | 7.4% | 7.2% | 8.4% | 8.3% |
| Comparable-store sales growth | 4% | 2% | 2% | 3% |
Quarterly sales grew 8.4%; nine-month sales grew 6.9%. Management attributed growth to 81 net new stores opened since the prior-year comparison and comparable-store sales gains. Cost of goods sold was 72.4% of quarterly sales and 71.6% of nine-month sales; SG&A was 15.8% and 14.8%, respectively. The quarterly and nine-month effective tax rates were approximately 37% and 38%.
Cash flow, balance sheet and liquidity
- For the first nine months, operating cash flow was $982.0 million, investing cash outflow $544.3 million, and financing cash outflow $289.3 million. Cash increased $148.4 million to $571.6 million.
- Cash capital expenditures were $551.5 million, versus $423.2 million a year earlier. Inventory was $1,495.0 million, up from $1,430.5 million at November 2, 2013.
- Long-term debt was $398.3 million carrying value (approximately $400 million principal), compared with $150 million at both prior balance-sheet dates. The company had no borrowings or standby letters of credit under its $600 million revolving facility, available through June 2017, and reported covenant compliance.
- Cash and cash equivalents were $571.6 million; current assets were $2,302.5 million and current liabilities $1,766.9 million. Management said cash, operating cash flow, credit lines and trade credit were adequate for expected needs for at least 12 months.
- The company repurchased approximately $418.5 million of common stock and paid $126.8 million in dividends during the nine-month period. Dividends declared were $0.60 per share for the period.
Material changes, outlook and risks
- In September 2014, Ross issued $250 million of 3.375% senior notes due 2024, receiving approximately $246 million net. Most funded the $222 million purchase of its New York buying-office building; the property is subject to a 99-year ground lease. Existing 6.38% notes due 2018 and 6.53% notes due 2021 total $150 million.
- Management forecast fiscal 2014 capital expenditures of approximately $700 million, reduced from its prior $730 million estimate due mainly to timing shifts and revised store construction estimates. It anticipated an approximately 38% fiscal 2014 effective tax rate. The filing provides no specific earnings or sales guidance.
- Management cited competitive pressure, consumer spending and preference changes, merchandise availability, weather, supply-chain and information-system disruption, execution of store growth, and cybersecurity as risks. It cautioned that recent sales growth and margins may not continue.
- Pending employment-related class actions and other legal and regulatory proceedings were not expected by management to materially adversely affect financial condition, results or cash flows. Unrecognized tax benefits were $101.1 million; up to $5.2 million could reduce tax expense if certain statutes of limitations lapse in the next 12 months.
- Ross was evaluating adoption of the new revenue-recognition standard, effective for its fiscal 2017 reporting periods. 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 intended reporting period: the provided filing is 2014 Q3, not 2013 Q3.
- Assess whether comparable-store sales growth, merchandise margins and expense leverage are sustainable, particularly against the prior-year nine-month comp-sales increase of 3%.
- Track inventory, accounts-payable leverage and operating cash flow, including the effects of packaway inventory and payment timing.
- Review the returns and funding implications of the store expansion, $700 million capital-spending plan, New York office purchase and new debt.
- Monitor stock repurchases, dividends, the remaining authorization under the two-year repurchase program, and litigation and tax contingencies.