Ross Stores, Inc. — Form 10-K Summary
Reporting period: The filing covers fiscal 2016, the 52 weeks ended January 28, 2017, and compares it primarily with fiscal 2015, ended January 30, 2016. This differs from the request metadata’s “2015 Q4.” Amounts below are U.S. dollars.
Business context
Ross operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. At fiscal year-end it had 1,533 stores: 1,340 Ross locations and 193 dd’s DISCOUNTS locations. Fiscal 2016 included 93 openings and six closures, for 87 net additions. The company describes its strategy as sourcing branded, in-season merchandise opportunistically and selling it at substantial discounts.
Financial performance and liquidity
| Metric | Fiscal 2016 | Fiscal 2015 | Change or context |
|---|---|---|---|
| Sales | $12.867 billion | $11.940 billion | Up 7.8%; comparable-store sales rose 4% in both years |
| Gross margin | 28.7% | 28.2% | Cost of goods sold was 71.3% and 71.8% of sales, respectively |
| SG&A as a share of sales | 14.7% | 14.6% | Higher mainly due to wage increases |
| Operating income | $1.803 billion | $1.624 billion | Calculated as earnings before taxes plus net interest expense |
| Net earnings | $1.118 billion | $1.021 billion | Up approximately 9.5%; net margin was 8.7% versus 8.5% |
| Diluted EPS | $2.83 | $2.51 | Up 13%, reflecting higher earnings and lower diluted share count |
| Operating cash flow | $1.559 billion | $1.326 billion | Higher earnings and timing of receipts/payments contributed to the increase |
| Capital expenditures | $298 million | $367 million | Lower primarily after completion of major projects |
Fourth-quarter sales were $3.510 billion versus $3.251 billion a year earlier; net earnings were $300.6 million versus $264.2 million, and diluted EPS was $0.77 versus $0.66.
Cash and cash equivalents were $1.112 billion at year-end, up from $762 million. Current assets were $2.813 billion and current liabilities $1.753 billion; the reported current ratio was 1.6:1. Merchandise inventory was $1.513 billion, with packaway inventory representing 49% of total inventory, up from 47%.
Long-term debt had a carrying value of $396.5 million and aggregate principal of $400 million. The company had no borrowings under its $600 million revolving credit facility, which remained available; it reported compliance with debt covenants. Fiscal 2016 financing included $700 million of common-stock repurchases and $214.6 million of dividends paid. The board later authorized a new $1.75 billion, two-year repurchase program.
Material changes versus fiscal 2015
- Sales growth moderated to 7.8% from 8.1%, while comparable-store sales growth remained 4%.
- Gross margin improved by about 55 basis points, driven principally by improved merchandise margin and lower buying, distribution, and occupancy costs as a share of sales.
- SG&A rose 15 basis points as a share of sales, primarily due to higher wages.
- Operating cash flow increased to $1.559 billion from $1.326 billion; capital expenditures declined by approximately $69 million.
- Cash increased by approximately $350 million during the year. Store count increased 6% to 1,533.
Outlook, risks, and unusual items
- Management forecast approximately $400 million of fiscal 2017 capital expenditures, funded from available cash and operating cash flows. It anticipated an effective tax rate of 37%–38% and said existing liquidity sources were adequate for at least the next 12 months. The filing does not provide a specific fiscal 2017 sales or earnings forecast.
- Management intended to continue store expansion, primarily in existing markets while also expanding in newer markets, and to invest in merchandising, systems, and distribution capabilities.
- Key risks include intense competition, shifts in consumer spending and preferences, weather, inventory markdowns and shortage, availability of attractive branded merchandise, wage and other operating-cost increases, cybersecurity and system disruptions, supply-chain interruptions, and changes to import tariffs or tax policy. Approximately 24% of stores and several major facilities are in California, creating geographic concentration exposure.
- Packaway inventory can support bargain sourcing but exposes the company to changing customer demand and affects operating cash flow. Management reported no long-lived-asset impairment charges in fiscal 2014–2016.
- Pending class-action litigation, primarily alleging wage-and-hour and consumer-protection violations, and other ordinary-course legal matters remained unresolved. Management believed their resolution would not materially adversely affect financial condition, results, or cash flows.
- Contractual commitments included $2.518 billion of operating-lease rent obligations in the obligations schedule, a separate $978 million New York office ground-lease commitment, and $2.146 billion of purchase obligations. The filing also disclosed total future minimum lease payments of $3.496 billion, including the ground lease.
- The company expected lease accounting changes to materially increase reported assets and liabilities when adopted, without a significant impact on earnings or cash flows. Adoption was planned for fiscal 2019.
- The independent auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Confirm the intended period: this is a fiscal 2016 annual report, not a fiscal 2015 Q4 filing; fiscal 2016 Q4 results are separately summarized above.
- Track whether comparable-store sales and merchandise margins remain resilient as the company expands and faces competition and wage pressure.
- Monitor packaway inventory, inventory turnover, markdowns, and the effect of inventory changes on operating cash flow.
- Assess capital returns against liquidity needs: the company repurchased $700 million of stock and paid $214.6 million in dividends in fiscal 2016, and subsequently authorized a $1.75 billion repurchase program.
- Review execution of the $400 million fiscal 2017 capital-spending plan, store growth, and the implications of lease obligations and future lease-accounting adoption.
- Follow developments in pending employment and consumer-protection litigation, tax audits, cybersecurity, and trade or tariff policy.