Ross Stores, Inc. — Form 10-K Summary
Reporting period: Fiscal 2011, the 52 weeks ended January 28, 2012. The request metadata says “2010 Q4,” but this filing covers fiscal 2011; it also provides comparative fourth-quarter data for fiscal 2011 and 2010. Amounts below are USD unless noted.
Business context
Ross operated 1,037 Ross Dress for Less stores and 88 dd’s DISCOUNTS stores at year-end, for 1,125 locations across the United States, the District of Columbia, and Guam. Both chains sell in-season branded apparel and home goods at discounts. The company reports one operating segment.
Financial performance
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Sales | $8.608 billion | $7.866 billion |
| Comparable-store sales growth | 5% | 5% |
| Cost of goods sold / sales | 72.5% | 72.8% |
| SG&A / sales | 15.2% | 15.6% |
| Earnings before taxes | $1.053 billion | $897.0 million |
| Net earnings | $657.2 million | $554.8 million |
| Diluted EPS | $2.86 | $2.31 |
| Operating cash flow | $820.1 million | $673.1 million |
| Capital expenditures | $416.3 million | $198.7 million |
Sales grew 9.4%, driven by 70 net new stores and 5% comparable-store growth. Net earnings rose about 18%; diluted EPS increased 24%, benefiting also from a 4% decline in weighted-average diluted shares. Gross margin improved about 35 basis points, with merchandise margin and occupancy leverage partly offset by higher freight, distribution, and buying costs. SG&A leverage improved about 50 basis points. Net margin was 7.6%, versus 7.1% in fiscal 2010.
Fiscal fourth quarter: Sales were $2.398 billion versus $2.145 billion in the year-earlier quarter; net earnings were $192.0 million versus $161.8 million; diluted EPS was $0.85 versus $0.69.
Financial position, liquidity, and capital allocation
- Cash and cash equivalents were $649.8 million, down from $833.9 million; working capital was $578.3 million and the current ratio was 1.4:1.
- Merchandise inventory was $1.130 billion, up from $1.087 billion. Packaway inventory represented 49% of total inventory, versus 47% a year earlier.
- Long-term debt was $150 million, consisting of senior notes due in 2018 and 2021. The company had no borrowings under its $600 million revolving credit facility, which expires in March 2016; it reported compliance with debt covenants.
- Operating cash flow increased to $820.1 million. Cash used in investing was $471.8 million, including $416.3 million of capital spending and increased restricted cash. Cash used in financing was $532.4 million, including $450 million of share repurchases and $102.0 million of dividends paid.
- Contractual obligations totaled $3.549 billion, including $2.013 billion of operating-lease rent obligations and $1.243 billion of purchase obligations. The company estimated a $4.6 million accrual for a potential shortfall under the Perris distribution-center synthetic-lease residual guarantee, which carries a maximum guarantee of $56 million.
Outlook, risks, and notable items
- Management planned to reduce average store inventory levels in 2012 while maintaining expense controls, and forecast approximately $450 million in 2012 capital expenditures. It expected a roughly 38% effective tax rate and said cash, operating cash flow, credit lines, and trade credit should fund needs for at least 12 months.
- Growth plans included continued Ross and dd’s DISCOUNTS expansion, including entry into new markets; distribution capacity was considered adequate for planned 2012 growth.
- Key risks include consumer spending and economic conditions, intense retail competition, merchandise availability and sourcing discounts, supply-chain disruption, weather, store-site availability, execution of growth and merchandising systems, inventory markdowns and shrink, and operating-cost control. The company also noted geographic concentration: 26% of stores and key facilities were in California.
- Pending wage-and-hour class actions and other ordinary-course litigation were not expected by management to have a material adverse effect. Tax reserves for unrecognized benefits were $53.5 million net of federal tax benefits; timing of any payments was uncertain.
- The company purchased a previously leased store property and land and buildings for a future Dublin, California headquarters for a combined approximately $100 million in the fourth quarter. It also completed a two-for-one stock split in December 2011; per-share figures in the filing reflect the split.
- Deloitte & Touche gave unqualified opinions on the financial statements and internal control over financial reporting. Management also reported effective disclosure controls and no material fourth-quarter change in internal controls.
Important facts for investors to verify
- Whether the intended period is fiscal 2011, as covered by this filing, or a different 2010 fourth-quarter filing.
- Whether sales and margin gains persist, particularly given competitive pressures and potential changes in consumer demand and merchandise sourcing.
- Inventory quality and turnover, including the elevated 49% packaway share and the effect of inventory commitments on cash flow.
- Execution and returns from the planned $450 million of 2012 capital spending and continued store expansion.
- Cash returned through buybacks and dividends versus liquidity needs, lease commitments, purchase obligations, and the Perris synthetic-lease guarantee.
- Developments in wage-and-hour litigation and tax audits or reserves; the filing does not provide a clear estimate of ultimate exposure.