Ross Stores, Inc. — Form 10-Q Summary
Period: The filing is for the quarter ended August 1, 2020, and covers the three- and six-month periods then ended. The request metadata says “2019 Q2,” but the filing itself is for fiscal 2020 Q2.
Business context and reporting period
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS. It had 1,832 stores at quarter-end. COVID-19 closures began March 20, 2020; phased reopening began May 14. Stores were open, on average, about 75% of Q2, and substantially all had reopened by the end of June. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $2.685 billion | $3.980 billion | $4.527 billion | $7.777 billion |
| Sales change | Down 32.5% | Up 6.5% | Down 41.8% | Up 6.1% |
| Comparable-store sales | Down 12%* | Up 3% | Not meaningful* | Up 2% |
| Net earnings (loss) | $22.0 million | $412.7 million | $(283.8) million | $833.9 million |
| Diluted EPS | $0.06 | $1.14 | $(0.81) | $2.29 |
| Cost of goods sold / sales | 77.4% | 71.4% | 87.7% | 71.3% |
| SG&A / sales | 19.4% | 14.9% | 20.6% | 14.8% |
| Net margin | 0.8% | 10.4% | (6.3)% | 10.7% |
*Q2 2020 comparable sales reflect reopened stores and the days they were open; the six-month 2020 measure was not meaningful because stores were open for less than seven weeks in the first quarter.
Six-month operating cash flow was $172.4 million, down from $1.083 billion. Investing cash outflow was $250.0 million, primarily capital expenditures. Financing provided $2.520 billion, largely from debt issuance and revolving-credit borrowings. Cash and cash equivalents were $3.793 billion at August 1, 2020; cash including restricted cash was $3.854 billion.
Reported debt was approximately $3.089 billion: $802.5 million short-term and $2.286 billion long-term. This included an $800 million draw on the revolving facility and $2.0 billion of senior notes issued in April. Management reported more than $4.3 billion of liquidity, including unrestricted cash and the available $500 million 364-day facility.
Material changes versus the prior comparable period
- Q2 sales fell 32.5%, and six-month sales fell 41.8%, primarily because of store closures and weaker demand amid COVID-19.
- Six-month results shifted from $833.9 million net income to a $283.8 million net loss. Q2 remained profitable, but net income declined by $390.7 million year over year.
- Gross margin pressure reflected lower sales, markdowns, and pandemic-related costs. A $313 million Q1 inventory valuation charge was partially reversed by a $174 million Q2 benefit after aged inventory sold faster than expected.
- Cash was bolstered by $2.0 billion of senior notes and the $800 million revolver draw; debt and net interest expense increased substantially.
- The company suspended share repurchases in March and quarterly dividends in May. Six-month repurchases and dividends were $132.5 million and $101.4 million, respectively, versus $640.3 million and $186.6 million in the prior-year period.
Outlook, commentary, and risks
- Management said it could not forecast the full pandemic impact and expected material adverse effects on results, financial position, and cash flows through the remainder of fiscal 2020 and potentially beyond. No earnings or sales guidance was provided.
- Management cited initial reopening demand and faster-than-expected aged-inventory sell-through, followed by weaker trends as store inventory became depleted during the ramp-up of buying and distribution.
- Fiscal 2020 capital expenditures were projected at approximately $420 million, reduced from an original plan of approximately $730 million. About 39 stores were planned to open in fiscal Q3; new-store plans had been reduced.
- COVID-related reopening, safety, cleaning, and protective-equipment measures added approximately $65 million of net costs in Q2; management expected elevated costs to continue.
- Key risks include renewed closures, consumer-demand and shopping-pattern uncertainty, inventory imbalance and markdowns, supply-chain disruption, operating costs, and concentration of stores and distribution facilities in regions exposed to outbreaks. Rent deferrals were primarily expected to be repaid in fiscal 2021.
- Credit agreements included temporarily modified financial covenants and minimum-liquidity requirements. The company reported compliance as of August 1, 2020. The $500 million facility expires in April 2021.
- Management said pending litigation was not expected to have a material adverse effect; actual outcomes remain uncertain. COVID-related estimates, including inventory and tax estimates, were described as particularly uncertain.
Important facts for investors to verify
- Confirm the reporting-period mismatch in the request metadata: this filing reports Q2 2020, not Q2 2019.
- Track reopening trends, comparable sales, customer demand, and whether inventory replenishment resolves the post-reopening inventory shortfall.
- Assess cash generation and liquidity against debt service, rent-deferral repayments, capital spending, and potential renewed operating disruptions.
- Monitor covenant requirements, the 364-day facility’s April 2021 expiry, and management’s timing for restoring dividends or repurchases; no resumption timetable is stated.
- Evaluate whether the $174 million inventory-charge reversal and related markdown assumptions are supported by subsequent sell-through and margins.