Ross Stores, Inc. — Fiscal 2012 Form 10-K
Reporting period: Fiscal year ended February 2, 2013. The filing covers fiscal 2012, not fiscal 2011; fiscal 2012 had 53 weeks, versus 52 weeks in fiscal 2011. The fourth quarter was 14 weeks, so quarterly comparisons are affected by the extra week.
Business context
Ross operated 1,091 Ross Dress for Less stores and 108 dd’s DISCOUNTS stores, for 1,199 locations in total. Its off-price model sells first-quality apparel, accessories, footwear, and home fashions at discounts to conventional retail prices. The company reported one operating segment.
Financial performance and liquidity
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Sales | $9.721 billion | $8.608 billion |
| Comparable-store sales growth | 6% on a 52-week basis | 5% |
| Cost of goods sold / sales | 72.1% | 72.5% |
| SG&A / sales | 14.8% | 15.2% |
| Earnings before taxes | $1.265 billion; 13.0% of sales | $1.053 billion; 12.2% |
| Net earnings | $786.8 million; 8.1% of sales | $657.2 million; 7.6% |
| Diluted EPS | $3.53 | $2.86 |
| Operating cash flow | $979.6 million | $820.1 million |
| Capital expenditures | $424.4 million | $416.3 million |
Fiscal 2012 sales rose 12.9%, reflecting 74 net new stores and comparable-store growth. Gross-margin improvement, occupancy leverage, lower distribution costs as a share of sales, and SG&A leverage contributed to improved profitability. The 23% increase in diluted EPS also reflected a 3% reduction in weighted-average diluted shares, largely from repurchases.
Cash and cash equivalents were $646.8 million at year-end; working capital was $608.8 million and the current ratio was 1.4. Merchandise inventory was $1.209 billion, up from $1.130 billion. Cash declined $3.1 million over the year after operating cash flow, investment spending, repurchases, and dividends. Long-term debt was $150 million; the company had no borrowings under its $600 million revolving facility, which remains available through June 2017. The company reported compliance with debt covenants.
For the 14-week fourth quarter, sales were $2.761 billion and net earnings were $236.6 million, compared with $2.398 billion and $192.0 million in the prior-year quarter. Diluted EPS was $1.07 versus $0.85. The extra week limits direct comparability.
Material changes and capital allocation
- Stores increased from 1,125 to 1,199; the company opened 82 stores and closed eight Ross stores.
- Packaway inventory was 47% of total inventory at year-end, down from 49% a year earlier.
- Capital spending rose slightly to $424.4 million, with distribution projects accounting for $157.9 million.
- The company repurchased 7.5 million shares for approximately $450 million and paid $125.7 million in dividends. A new two-year, $1.1 billion repurchase authorization was approved for fiscal 2013 and 2014.
- The quarterly dividend was increased to $0.17 per share in January 2013.
Outlook, risks, and contingencies
Management forecast approximately $670 million of fiscal 2013 capital expenditures, principally for two new distribution centers, purchase of an existing leased distribution center, headquarters relocation, a new data center, and store and technology investments. The company expected to fund this spending with available cash and operating cash flows, and said existing liquidity sources were adequate for at least the next 12 months. Management planned further reductions in average store inventory while maintaining expense controls. The filing gives an expected fiscal 2013 effective tax rate of approximately 38%; it does not provide clear numerical sales or earnings guidance.
Key risks include intense retail competition; changes in consumer spending and preferences; availability of desirable branded merchandise; supply-chain or information-system disruptions; execution of store and distribution growth; and the ability to control markdowns, inventory shortage, payroll, and other costs. The company noted geographic concentration in California, where its headquarters, buying office, two distribution centers, a warehouse, and 25% of stores were located.
Pending wage-and-hour class actions and other ordinary-course legal matters were not expected by management to have a material adverse effect. The company disclosed $82.5 million of unrecognized tax benefits, including interest, whose payment timing could not be estimated. A $70 million synthetic lease on the Perris distribution center expires in July 2013; the company intended to purchase the facility at lease expiration. Total future operating lease payments were $2.138 billion, in addition to other contractual obligations. The company reported no long-lived asset impairment charges for fiscal 2012.
Important facts for investors to verify
- Assess sales and margin trends on a comparable 52-week basis, particularly given the extra fiscal and fourth-quarter weeks.
- Check whether planned fiscal 2013 capital projects, store expansion, and new distribution capacity are delivered on schedule and within budget.
- Monitor inventory growth, packaway mix, markdowns, shortage reserves, and the resulting effect on gross margin and operating cash flow.
- Review the pace and funding of the $1.1 billion repurchase authorization alongside dividends and capital spending.
- Track the Perris facility purchase, lease commitments, tax-position developments, and pending employment litigation.