Ross Stores, Inc. (ROST) - 10-K Summary
Business Context and Reporting Period
Company: Ross Stores, Inc.
Filing Type: Annual Report (Form 10-K)
Period Ended: February 1, 2003 (Fiscal Year 2002)
Business Model: Off-price retailer of brand-name apparel, home accessories, and footwear. Ross targets value-conscious consumers, offering merchandise at 20% to 60% below regular department store prices through opportunistic buying strategies (closeouts and packaways).
Store Count: 507 stores as of February 1, 2003, operating in 23 states and Guam.
Key Financial Metrics
| Metric ($ in millions, except per share) | Fiscal 2002 | Fiscal 2001 | Fiscal 2000 |
|---|---|---|---|
| Total Sales | $3,531.3 | $2,986.6 | $2,709.0 |
| Net Earnings | $201.2 | $155.0 | $151.8 |
| Diluted EPS | $2.52 | $1.91 | $1.82 |
| Operating Cash Flow | $332.4 | $242.9 | $143.3 |
| Cost of Goods Sold (as % of Sales) | 74.4% | 75.1% | 74.5% |
| Gross Margin (as % of Sales) | 25.6% | 24.9% | 25.5% |
| Long-Term Debt | $25.0 | $0 | $30.0 |
| Working Capital | $295.7 | $225.4 | $197.0 |
| Current Ratio | 1.5:1 | 1.5:1 | 1.5:1 |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 18% to $3.53 billion, driven by a 7% increase in comparable store sales and the opening of 55 net new stores (60 opened, 5 closed).
- Profitability: Net earnings rose 30% to $201.2 million. Diluted EPS increased 32% to $2.52, aided by a 2% reduction in weighted average diluted shares outstanding due to stock repurchases.
- Margin Expansion: Gross margin improved by 70 basis points (from 24.9% to 25.6%) due to lower markdowns, improved shortage results, and better leverage on buying and distribution costs.
- Accounting Reclassification: In 2002, the company reclassified buying, distribution, and occupancy costs from "General, Selling and Administrative" (GS&A) to "Cost of Goods Sold." Prior periods were restated to conform.
- Capital Structure: The company incurred $25 million in long-term debt in 2002 to finance equipment for a new distribution center, compared to zero debt in 2001.
Guidance, Outlook, and Risks
- Capital Expenditures: Forecasting approximately $150 million in capital expenditures for fiscal 2003 to fund 66 new stores and system upgrades.
- Expansion: Construction is underway on a new 1.3 million sq. ft. distribution center in Perris, California, expected to be operational in Q3 2003. This will replace the Newark facility as the primary West Coast hub.
- Stock Repurchase: Under a $300 million program authorized in 2002, the company repurchased $150 million of stock in 2002 and expects to complete the remaining $150 million in 2003.
- Dividends: Quarterly dividends increased to $0.0575 per share in January 2003 (up from $0.0475 in 2002).
- Accounting Risks (FIN 46): New FASB rules (FIN 46) regarding the consolidation of Variable Interest Entities (VIEs) may require the company to consolidate its synthetic lease facilities for distribution centers. This could add approximately $80 million in assets and debt to the balance sheet starting in Q3 2003.
- Operational Risks: Significant exposure to the California economy (35% of stores and headquarters located there) and reliance on obtaining brand-name merchandise at competitive discounts.
Investor Verification Checklist
- FIN 46 Impact: Verify the timing and magnitude of the balance sheet impact from consolidating the Perris and South Carolina distribution center synthetic leases.
- Comparable Store Sales: Monitor the sustainability of the 7% comparable store sales growth rate in a competitive off-price environment.
- Inventory Levels: Review inventory turnover and "packaway" inventory ratios (44% of total inventory) to assess potential markdown risks.
- Debt Covenants: Confirm compliance with interest coverage and leverage ratios required by the new term loan and synthetic lease facilities.
- California Exposure: Assess the potential impact of regional economic downturns or natural disasters on operations, given the concentration of assets in California.