Ross Stores, Inc. 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 May 1, 1999. Ross Stores operates as an off-price retailer of brand-name apparel and home fashions. As of the end of the period, the company operated 355 stores, an increase from 331 stores in the prior year period.
Key Financial Metrics
| Metric ($000s) | Q1 1999 | Q1 1998 |
|---|---|---|
| Sales | $550,825 | $484,276 |
| Net Earnings | $34,163 | $27,850 |
| Net Earnings Per Share (Diluted) | $0.73 | $0.57 |
| Net Cash from Operating Activities | ($9,256) | $8,276 |
| Cash and Cash Equivalents (End of Period) | $33,307 | $29,725 |
| Merchandise Inventory | $516,107 | $460,578 |
| Total Assets | $881,146 | $761,307 |
| Long-term Liabilities | $45,570 | $40,085 |
Margins: Net earnings margin improved to 6.2% from 5.8% in the prior year. Cost of goods sold and occupancy decreased to 68.9% of sales from 69.6%.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 13.7% year-over-year, driven by a 7% increase in comparable store sales and the opening of new locations.
- Profitability: Net earnings rose 22.7% to $34.2 million. This was primarily due to improved merchandise margins (higher initial markups) and leverage on occupancy costs.
- Cash Flow: Operating cash flow turned negative at ($9.3 million) compared to positive $8.3 million in the prior year. This was caused by a significant increase in inventory purchases ($49.6 million outflow) to support store growth and packaway merchandise.
- Capital Allocation: The company repurchased approximately 828,000 shares of common stock for $36 million under a $120 million program announced in January 1999.
- Tax Payments: Income taxes paid surged to $19.5 million from $3.9 million, attributed to the timing of tax deductions related to employee stock plans.
Outlook, Risks, and Management Commentary
- Liquidity: Management believes internally generated cash, trade credit, and bank lines are sufficient to fund operations and capital needs for the remainder of the fiscal year and the next.
- Year 2000 (Y2K) Compliance: The company estimates total Y2K remediation costs at approximately $12.0 million ($6.0 million capital, $6.0 million operating). Over 90% of mission-critical systems are compliant or have workarounds. Integration testing is expected to complete by mid-1999.
- Seasonality: The apparel industry is highly seasonal, with the majority of profits historically realized in the fourth (holiday) quarter. Results for the first two quarters are typically lower.
- Risks: Key risks include competitive pressures, consumer spending trends, unseasonable weather, and the potential for operational disruption if third-party vendors (e.g., power, telecommunications) fail to achieve Y2K compliance. Additionally, 44% of stores and key facilities are located in California, exposing the company to regional economic or natural disaster risks.
Investor Verification Checklist
- Verify the sustainability of the 7% comparable store sales growth rate in subsequent quarters.
- Monitor the conversion of the $516 million inventory buildup into sales to ensure no future markdown pressure.
- Confirm the completion of Y2K integration testing and the status of critical third-party vendor compliance.
- Review the impact of the $36 million stock repurchase on future liquidity and capital expenditure plans.
- Assess the company's exposure to the California economy given the concentration of stores and headquarters.