Ross Stores, Inc. - 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Ross Stores, Inc., covering the three-month period ended May 5, 2007. Ross is 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 830 stores (796 Ross and 34 dd's DISCOUNTS) across 27 states and Guam.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Sales | $1,410.5 million | $1,291.7 million |
| Net Earnings | $67.0 million | $59.2 million |
| Diluted EPS | $0.48 | $0.41 |
| Operating Cash Flow | ($66.0 million) used | $105.5 million provided |
| Cash and Equivalents | $199.1 million | $145.2 million |
| Long-Term Debt | $150.0 million | $0 |
| Working Capital | $472.0 million | $376.9 million |
Margins: Cost of goods sold decreased to 76.0% of sales (from 76.6% prior year). Selling, general, and administrative (SG&A) expenses increased to 16.3% of sales (from 16.0%). The effective tax rate was approximately 39%.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 9.2% year-over-year, driven primarily by the addition of 84 net new stores over the last twelve months. Comparable store sales growth was flat at 0% compared to 6% in the prior year.
- Profitability: Net earnings rose 13.2% to $67.0 million. Diluted EPS increased 17% due to higher net earnings and a 3% reduction in weighted average diluted shares outstanding from stock repurchases.
- Cash Flow Volatility: Operating cash flow swung from a positive $105.5 million in Q1 2006 to a negative $66.0 million in Q1 2007. Management attributes this primarily to a decline in accounts payable from elevated levels at the end of the prior fiscal year (due to a 53rd week in 2006) and timing of payments.
- Debt Structure: The company issued $150 million in unsecured senior notes in late 2006 (Series A and B), which appear on the balance sheet as long-term debt. There were no borrowings under the $600 million revolving credit facility.
Guidance, Outlook, and Risks
- Capital Expenditures: The company forecasts approximately $290 million in capital expenditures for fiscal 2007 to fund new store openings, relocations, and system upgrades.
- Tax Outlook: Management anticipates an effective tax rate of 38% to 40% for fiscal 2007.
- Dividends: A quarterly cash dividend of $0.075 per share was declared in May 2007, payable in July 2007.
- Stock Repurchases: The company continues its $400 million stock repurchase program, having spent approximately $50.9 million in the quarter.
- Legal Contingencies: The company settled a class action lawsuit regarding assistant store manager classification in California during the quarter. Other pending litigation regarding meal/rest breaks is not expected to have a material adverse effect.
- Risks: Key risks include competitive pressures, consumer spending trends, supply chain disruptions, and the ability to convert acquired Albertsons real estate sites into profitable Ross locations.
Investor Verification Checklist
- Verify the sustainability of the 0% comparable store sales growth given the 9% total sales increase driven by new store openings.
- Monitor the reversal of the accounts payable timing effect to confirm if operating cash flow returns to positive levels in subsequent quarters.
- Track the execution of the Albertsons real estate acquisition (46 sites) and the timeline for converting these locations into revenue-generating stores.
- Review the impact of the new $150 million senior notes on future interest coverage ratios and leverage covenants.
- Assess the effectiveness of the company's strategy to offset rising freight and occupancy costs through margin improvements.