Ross Stores, Inc. — Form 10-Q Summary
Period: Quarter and six months ended July 30, 2011, compared with periods ended July 31, 2010. The request metadata says “2010 Q2,” but the filing itself reports fiscal 2011 second-quarter results.
Business context and reporting period
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS. At quarter-end it had 1,091 stores, including 1,013 Ross locations and 78 dd’s DISCOUNTS locations. The unaudited interim statements were reviewed by Deloitte & Touche, not audited.
Financial performance
| Metric | Three months ended July 30, 2011 | Six months ended July 30, 2011 |
|---|---|---|
| Sales | $2.089 billion; up 9.3% | $4.164 billion; up 8.3% |
| Comparable-store sales growth | 5% | 4% |
| Net earnings | $148.3 million; up 15% | $321.2 million; up 18% |
| Diluted EPS | $1.28, versus $1.07 | $2.76, versus $2.24 |
| Gross margin (sales less cost of goods sold) | 27.1%, versus 27.0% | 27.8%, versus 27.2% |
| SG&A as a percentage of sales | 15.4%, versus 15.9% | 15.1%, versus 15.6% |
Operating cash flow for the six months was $161.7 million, down from $304.8 million. Investing cash outflow was $209.0 million, including $145.7 million of capital expenditures and $73.5 million transferred to restricted accounts. Financing cash outflow was $273.9 million, including $230.2 million of share repurchases and $51.6 million of dividends. Cash and cash equivalents ended the period at $512.7 million, down from $833.9 million at fiscal year-end.
At July 30, 2011, total assets were $3.055 billion and current assets were $1.870 billion against current liabilities of $1.165 billion. Long-term debt was $150 million. The company also had a $600 million revolving facility, with no borrowings or letters of credit outstanding under it; it was in compliance with debt covenants. The facility expires in March 2016.
Material changes and management commentary
- Sales growth reflected 55 net new stores since the prior-year quarter and positive comparable-store sales. The company opened 41 stores and closed five during the six-month period.
- Quarterly gross-margin improvement was driven mainly by fewer markdowns, faster inventory turns, and occupancy leverage; higher distribution expense and freight partly offset the gains. Management cautioned that these margins may not continue.
- Operating cash flow fell primarily because of cash invested in additional packaway inventory. Packaway rose to 49% of inventory from 47% at fiscal year-end; accounts-payable leverage declined to 60% from 71%.
- Management forecast fiscal 2011 capital expenditures of approximately $305–$315 million, with some distribution-center projects deferred to 2012, and an approximately 38% effective tax rate. It expected available cash, operating cash flow, bank lines, and trade credit to cover needs for at least the next 12 months.
- The board authorized a new two-year, $900 million repurchase program in January 2011. The company repurchased approximately $230.2 million of shares in the first six months. The quarterly dividend declared in August was $0.22 per share.
Risks, contingencies, and unusual items
- In July 2011, $73.5 million was placed in restricted accounts as collateral for insurance obligations. Restricted funds cannot be withdrawn without secured parties’ consent.
- Pending California wage-and-hour class actions and other ordinary-course legal proceedings remain unresolved. Management did not expect their resolution to materially adversely affect financial condition, results, or cash flows.
- The company disclosed a $46.6 million reserve for unrecognized tax benefits; up to $1.3 million could reduce tax expense if certain statutes of limitations lapse within 12 months. State tax audits were ongoing, with no material impact expected by management.
- A synthetic lease for a distribution center includes a residual-value guarantee of up to $56 million; the company had accrued approximately $4.6 million for an estimated shortfall.
- Key operating risks include consumer and macroeconomic conditions, competition, merchandise availability, supply-chain disruption, weather, store expansion execution, and inventory, markdown, shrink, and labor-cost management. The filing identifies significant California concentration: 26% of stores and several facilities are located there.
Important facts for investors to verify
- Confirm the intended reporting period: the filing covers fiscal 2011 Q2, despite the request metadata’s “2010 Q2.”
- Track whether comparable-store sales, markdown levels, inventory turns, and gross-margin gains persist.
- Assess packaway inventory growth and its effects on operating cash flow, inventory risk, and vendor-payment leverage.
- Monitor capital spending, share repurchases, dividends, and the resulting cash balance and liquidity.
- Follow developments in wage-and-hour litigation, tax reserves and audits, and the synthetic-lease residual-value exposure.