Ross Stores, Inc. - Q2 2008 Financial Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended August 2, 2008, and the six-month period ended on the same date. Ross Stores, Inc. operates as the second-largest off-price apparel and home goods retailer in the United States, operating under the banners "Ross Dress for Less" and "dd's DISCOUNTS." As of the period end, the company operated 943 stores (888 Ross and 55 dd's DISCOUNTS) across 27 states and Guam.
Key Financial Metrics
| Metric ($000s) | 3 Months Ended Aug 2, 2008 |
3 Months Ended Aug 4, 2007 |
6 Months Ended Aug 2, 2008 |
6 Months Ended Aug 4, 2007 |
|---|---|---|---|---|
| Sales | $1,640,412 | $1,444,632 | $3,196,740 | $2,855,173 |
| Net Earnings | $71,299 | $50,863 | $150,784 | $117,907 |
| Diluted EPS | $0.54 | $0.37 | $1.13 | $0.85 |
| Operating Cash Flow | N/A | N/A | $306,556 | $7,648 |
| Cash & Equivalents | $309,554 | $132,808 | $309,554 | $132,808 |
| Long-Term Debt | $150,000 | $150,000 | $150,000 | $150,000 |
| Working Capital | $394,565 | $447,067 | $394,565 | $447,067 |
Note: Working Capital calculated as Total Current Assets less Total Current Liabilities.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 13.6% for the quarter and 12.0% for the six-month period compared to the prior year. This growth was driven by the addition of 81 net new stores and a 6% increase in comparable store sales for the quarter (5% for the six months).
- Profitability: Net earnings rose 40% for the quarter and 28% for the six-month period. Diluted EPS increased 46% and 33% respectively, aided by a 4% reduction in weighted average shares due to stock repurchases.
- Margins: Cost of goods sold as a percentage of sales improved (decreased) by 180 basis points for the quarter and 90 basis points for the six months, driven by higher merchandise gross margins and improved distribution costs.
- Cash Flow: Net cash provided by operating activities surged to $306.6 million for the six months ended August 2, 2008, compared to only $7.6 million in the prior year period, largely due to increased accounts payable leverage and faster inventory turns.
Guidance, Outlook, and Risks
- Capital Expenditures: The company forecasts approximately $240 million in capital requirements for fiscal year 2008 to fund new store openings, distribution center investments, and systems upgrades.
- Dividends: The Board declared a quarterly cash dividend of $0.095 per share, payable October 1, 2008.
- Stock Repurchases: Under a $600 million program announced in January 2008, the company repurchased approximately 4.6 million shares for $152.6 million during the six-month period. Approximately $147 million remained available under the program as of August 2, 2008.
- Risks and Contingencies:
- Legal Proceedings: The company is involved in class action lawsuits regarding wage and hour claims (meal/rest breaks, overtime). Management does not expect a material adverse effect on financial condition.
- Investment Portfolio: The company holds $1.9 million in auction-rate securities collateralized by student loans. These are classified as long-term investments due to potential liquidity constraints in the market.
- Market Risks: Exposure to interest rate changes on variable-rate debt (currently no borrowings on the $600M revolving credit facility) and synthetic leases. The company is in compliance with all debt covenants.
Investor Verification Checklist
- Comparable Store Sales Sustainability: Verify if the 6% comparable store sales growth can be maintained given competitive pressures and economic conditions.
- Inventory Management: Monitor the "packaway" inventory strategy and potential write-downs if market conditions or sales velocity deteriorate.
- Legal Exposure: Track the status of pending wage and hour class action lawsuits for potential settlement impacts.
- Capital Allocation: Assess the balance between aggressive store expansion ($240M capex forecast) and shareholder returns (dividends and buybacks).
- Liquidity of Investments: Review the status of the $1.9 million auction-rate securities and any potential impairment charges if the market does not recover within 12 months.