Ross Stores, Inc. — Form 10-Q Summary
Reporting-period clarification: The request identifies 2021 Q2, but the filing covers the quarter and six months ended July 30, 2022 (fiscal 2022 Q2), compared with periods ended July 31, 2021.
Business context and period
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. At July 30, 2022, it had 1,980 stores: 1,669 Ross and 311 dd’s DISCOUNTS. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial results
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Sales | $4,583 million | $4,805 million | $8,916 million | $9,321 million |
| Comparable-store sales | (7)% | 15% growth* | (7)% | 14% growth* |
| Net earnings | $385 million | $494 million | $723 million | $971 million |
| Diluted EPS | $1.11 | $1.39 | $2.08 | $2.73 |
| Cost of goods sold / sales | 74.2% | 71.0% | 74.0% | 70.9% |
| Net earnings / sales | 8.4% | 10.3% | 8.1% | 10.4% |
*The filing’s FY2021 comparable-sales figures compare with FY2019. Sales declined 4.6% for the quarter and 4.3% year to date. Management attributed the weakness mainly to lower comparable sales, inflationary pressure on customers, and comparison with FY2021 periods benefiting from stimulus and post-restriction demand.
- Margins and expenses: Cost of goods sold rose 320 basis points as a share of quarterly sales and 305 basis points year to date. Drivers included lower merchandise margin from ocean freight costs and markdowns, higher freight and distribution costs, and occupancy-cost deleverage. Lower incentive compensation partly offset these pressures. Quarterly SG&A was down $51 million; as a share of sales it fell 40 basis points. Six-month SG&A as a share of sales rose 5 basis points.
- Cash flow: Six-month operating cash flow was negative $56 million, versus positive $1,345 million a year earlier. Inventory growth, lower accounts-payable leverage, shorter vendor payment terms, incentive-bonus payments, and lower earnings were cited as factors. Investing cash outflow was $243 million; financing cash outflow was $719 million. Cash and restricted cash decreased $1,019 million during the period.
- Liquidity and debt: Cash and cash equivalents were $3,904 million at July 30, 2022. Current assets were $6,985 million and current liabilities $3,645 million. Long-term debt was $2,454 million, with no current portion reported. The company had no borrowings or letters of credit under its $1.3 billion revolving facility, which remained available; it was in compliance with the facility covenant. Operating lease liabilities were $3,173 million in total.
- Inventory and capital returns: Merchandise inventory was $2,717 million, up from $1,751 million at July 31, 2021. Packaway represented 41% of inventory, versus 30% a year earlier. The company repurchased 5.5 million shares for $475 million in the first six months and paid $217 million in dividends. The board declared a $0.31-per-share dividend payable September 30, 2022.
Material changes, outlook, and risks
Quarterly diluted EPS fell 20% year over year; six-month diluted EPS fell 24%. The six-month earnings decline reflected lower net earnings, partly offset on a per-share basis by a 2% reduction in diluted weighted-average shares. The store base increased by 84 net locations year over year; 59 stores opened in the first six months.
- Management expected higher freight costs and distribution expenses to continue affecting Q3 FY2022, with elevated merchandise markdowns continuing through FY2022. It also expected wages and inflation to pressure operating costs.
- FY2022 plans included approximately 100 new stores and approximately $735 million of capital expenditures. The company expected to fund capital spending with available cash. It also stated an expectation to repurchase $950 million of stock during FY2022 under a new $1.9 billion program through FY2023.
- Management said existing cash, operating cash flow, the credit facility, and trade credit should cover operating needs, planned investment, repurchases, and dividends for at least 12 months.
- Key uncertainties include inflation, interest-rate increases and recession concerns, Russia-Ukraine-related impacts, COVID-19 developments, consumer demand, markdowns and inventory management, supply-chain disruptions and freight costs, competition, and cybersecurity and legal risks.
- Pending employment and consumer-protection class or representative actions and other legal matters were disclosed; management did not expect their resolution to materially adversely affect financial condition, results, or cash flows. The filing also disclosed $69.3 million of reserves for unrecognized tax benefits; up to $11.5 million could decrease over the next 12 months.
Important facts for investors to verify
- Confirm the intended period: this filing is for FY2022 Q2, not 2021 Q2.
- Track whether comparable sales stabilize and whether markdowns and freight/distribution costs ease as management expected.
- Monitor inventory, packaway levels, vendor payment terms, and operating cash flow after the substantial year-over-year cash-flow decline.
- Verify progress against store-opening, capital-expenditure, and share-repurchase plans, and assess their effect on cash and liquidity.
- Review subsequent filings for developments in macroeconomic, supply-chain, COVID-19, litigation, and tax uncertainties.