Ross Stores, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and six months ended July 31, 2010, compared with the periods ended August 1, 2009. Although the request metadata says “2009 Q2,” the filing itself reports fiscal 2010 Q2. Dollar amounts below are in millions unless stated otherwise.
Business context and results
Ross Stores operated 1,036 stores at quarter-end: 979 Ross Dress for Less locations and 57 dd’s DISCOUNTS locations. The company sells off-price apparel, accessories, footwear, and home goods.
| Metric | Three months ended July 31, 2010 | Six months ended July 31, 2010 |
|---|---|---|
| Sales | $1,911.8; up 8.1% year over year | $3,846.5; up 11.2% |
| Comparable-store sales growth | 4% | 7% |
| Net earnings | $129.3; versus $103.4 | $271.6; versus $194.8 |
| Diluted EPS | $1.07; versus $0.82 | $2.24; versus $1.55 |
| Gross margin (sales less cost of goods sold) | 27.0%; versus 25.9% | 27.2%; versus 25.4% |
| Net margin | 6.8%; versus 5.8% | 7.1%; versus 5.6% |
Financial position and cash flow
- At July 31, 2010, cash and cash equivalents were $772.7 million, short- and long-term investments totaled $21.0 million, and merchandise inventory was $915.7 million. Total current assets were $1,814.8 million and current liabilities were $1,179.6 million.
- Long-term debt was $150.0 million in senior notes; there were no revolver borrowings. The $600 million revolving credit facility expires in July 2011, with $216.7 million of standby-letter-of-credit capacity available. The company reported covenant compliance.
- Six-month operating cash flow was $304.8 million, down from $414.0 million. Investing cash outflow was $89.9 million, including $88.1 million of capital expenditures; financing cash outflow was $210.6 million. Cash increased $4.3 million to $772.7 million.
- Financing uses included $193.0 million of common-stock repurchases and $39.1 million of dividends paid. The board declared a quarterly dividend of $0.16 per share in August 2010.
Changes, outlook, and risks
- Year-over-year sales growth reflected 46 net new stores and comparable-store gains. Cost of goods sold as a percentage of sales improved by 110 basis points in Q2 and 170 basis points for the half; SG&A as a percentage of sales improved by 30 and 60 basis points, respectively. Management attributed the cost improvement principally to merchandise gross margin, with additional benefits from distribution and occupancy costs. It cautioned that margins may not continue.
- Operating cash flow declined mainly because of changes in accounts-payable leverage and payment of incentive bonuses. Store count increased from 990 at the comparable prior-year quarter-end.
- Management forecast approximately $215 million of fiscal 2010 capital expenditures, funded with cash and operating cash flow. It expected cash flows, credit lines, and trade credit to meet operating needs, planned investment, repurchases, and dividends for at least 12 months. The anticipated fiscal 2010 effective tax rate was 38%–39%.
- Management noted that future sales and earnings growth are uncertain. Risks include competition, changes in consumer demand and economic conditions, weather, merchandise availability, supply-chain disruption, new-store execution, and the ability to manage inventory, markdowns, shrink, and operating costs. California concentration is notable: the headquarters, Los Angeles buying office, two distribution centers, and 26% of stores are in the state.
- Pending wage-and-hour class actions and other ordinary-course litigation were not expected by management to materially adversely affect financial condition, results, or cash flows. Unrecognized tax benefits were $36.5 million, including interest; up to $1.4 million could reduce tax expense if certain statutes of limitation lapse within 12 months. The filing reports no expected material impact from current state tax audits.
- Contractual obligations totaled $3.66 billion, including $2.03 billion of rent obligations and $1.32 billion of purchase obligations, primarily merchandise orders due within one year. A $70 million synthetic lease for the Perris distribution center includes a residual-value guarantee with potential exposure up to $56 million.
Most important facts to verify
- Whether comparable-store momentum and the reported gross-margin improvement persisted after July 31, 2010.
- Liquidity and refinancing plans for the revolving credit facility expiring in July 2011, alongside the company’s substantial lease and purchase commitments.
- Progress and remaining authorization under the $750 million fiscal 2010–2011 repurchase program; the company repurchased $193.0 million of shares during the first half.
- Developments in wage-and-hour litigation, tax audits, and the unrecognized-tax-benefit balance.
- Actual fiscal 2010 capital expenditures versus the approximately $215 million forecast, and whether management’s 12-month liquidity assessment remains supportable.
The interim financial statements were unaudited and subject to an independent accountant’s review, not an audit. Management stated that only normal recurring adjustments were made.