Ross Stores, Inc. - 10-Q Filing Summary
Business Context and Reporting Period
This filing covers the quarterly period ended November 3, 2007, and the nine-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 893 stores (841 Ross and 52 dd's DISCOUNTS) across 27 states and Guam.
Key Financial Metrics
| Metric | Three Months Ended Nov 3, 2007 | Nine Months Ended Nov 3, 2007 |
|---|---|---|
| Sales | $1,468.3 million | $4,323.5 million |
| Net Earnings | $48.7 million | $166.6 million |
| Diluted EPS | $0.36 | $1.21 |
| Operating Cash Flow (9mo) | $132.4 million | |
| Cash and Equivalents (Nov 3, 2007) | $151.5 million | |
| Long-Term Debt | $150.0 million | |
| Working Capital | $401.4 million |
Margins (Nine Months): Cost of goods sold was 77.6% of sales; Selling, general and administrative (SG&A) expenses were 16.1% of sales. The effective tax rate was approximately 39%.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 7.8% for the quarter and 9.1% for the nine-month period compared to the prior year. This growth was driven by the addition of 95 net new stores and a 1% increase in comparable store sales.
- Profitability: Net earnings rose 11% for the quarter and 12% for the nine-month period. Diluted EPS increased 16% year-over-year for both periods, aided by a 3% decline in weighted average diluted shares due to stock repurchases.
- Cost Management: Cost of goods sold as a percentage of sales improved by 35 basis points for the nine-month period, driven by lower markdowns and inventory shortages, partially offset by higher freight and occupancy costs.
- Cash Flow: Net cash provided by operating activities decreased significantly to $132.4 million (from $330.2 million in the prior year) primarily due to a decline in accounts payable leverage following a high balance at the start of the fiscal year.
Guidance, Outlook, and Risks
- Capital Expenditures: The company forecasts approximately $255 million in total capital expenditures for fiscal 2007 to fund new store openings, relocations, and system upgrades.
- Dividends: The Board declared a quarterly cash dividend of $0.075 per share, payable in January 2008, an increase from the $0.06 per share declared in the prior year.
- Stock Repurchases: Under a $400 million program, the company repurchased approximately 5.0 million shares for $152.6 million during the nine-month period. Approximately $47 million remained available under the program as of November 3, 2007.
- Risks and Contingencies:
- Legal Proceedings: The company faces pending class action lawsuits regarding wage and hour claims (meal/rest breaks and overtime). Management does not expect a material adverse effect on financial condition.
- Tax Reserves: Following the adoption of FIN 48, the company maintains a reserve of $28.1 million for unrecognized tax benefits.
- Market Risks: Exposure to interest rate changes on variable-rate debt (currently no borrowings under the revolving credit facility) and potential disruptions in supply chains or changes in consumer spending.
Investor Verification Checklist
- Verify the sustainability of the 1% comparable store sales growth in a competitive off-price environment.
- Monitor the impact of rising freight and occupancy costs on gross margins in future quarters.
- Review the status of pending wage and hour litigation and potential settlement costs.
- Assess the company's ability to execute its $255 million capital expenditure plan while maintaining liquidity.
- Confirm the timeline and financial impact of the Albertsons real estate site conversions (37 of 46 sites opened to date).