Ross Stores, Inc. - Q1 2006 Financial Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended April 29, 2006. 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 746 stores across 27 states and Guam.
Key Financial Metrics
| Metric ($000s) | Q1 2006 | Q1 2005 |
|---|---|---|
| Sales | $1,291,676 | $1,123,937 |
| Net Earnings | $59,217 | $50,050 |
| Diluted EPS | $0.41 | $0.34 |
| Operating Cash Flow | $105,465 | $95,246 |
| Cash & Equivalents (End) | $145,230 | $144,381 |
| Long-Term Debt | $0 | $50,000 |
| Short-Term Debt | $0 | $0 |
Margins (as % of Sales):
- Gross Margin: 23.4% (Cost of Goods Sold was 76.6%)
- Operating Margin (EBT): 7.6%
- Net Margin: 4.6%
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 15% year-over-year, driven by the opening of 73 net new stores and a 6% increase in comparable store sales.
- Profitability: Net earnings rose 18% to $59.2 million. Diluted EPS increased to $0.41 from $0.34, aided by higher net earnings and a reduction in weighted average shares due to stock repurchases.
- Debt Reduction: The company repaid its entire $50.0 million term debt in March 2006, resulting in zero long-term debt on the balance sheet as of April 29, 2006.
- Accounting Changes: The company adopted SFAS No. 123(R) for stock-based compensation in fiscal 2006. This adoption decreased earnings before taxes by approximately $3.5 million and net income by $2.1 million for the quarter. Prior periods were not restated.
- Store Count: Total stores increased from 673 to 746, with 12 new stores opened during the quarter.
Guidance, Outlook, and Risks
- Capital Expenditures: Management forecasts approximately $265.0 million in capital expenditures for fiscal 2006. This includes an $87.3 million cash purchase of the Fort Mill, South Carolina distribution center exercised in May 2006 (subsequent event).
- Dividends: The Board declared a cash dividend of $0.06 per share in May 2006, payable in June 2006.
- Stock Repurchases: The company repurchased approximately 1.7 million shares for $48.9 million during the quarter under a $400 million program authorized in November 2005.
- Risks and Contingencies:
- Legal Proceedings: The company is involved in various legal proceedings, including class action lawsuits regarding employee payroll and wage claims in California. Management does not expect a material adverse effect.
- Supply Chain & Inventory: Risks include disruptions in supply chains, changes in consumer spending, and the availability of brand-name merchandise at desirable discounts.
- Geographic Concentration: 28% of stores, corporate headquarters, and two distribution centers are located in California, exposing the company to regional economic or natural disaster risks.
Investor Verification Checklist
- Debt Refinancing: Verify the company's ability to refinance the $87.3 million Fort Mill distribution center purchase and the $50 million term debt repayment within fiscal 2006.
- Comparable Store Sales: Monitor the sustainability of the 6% comparable store sales growth in a competitive off-price retail environment.
- Stock-Based Compensation Impact: Assess the ongoing impact of SFAS No. 123(R) adoption on future earnings and expense recognition.
- Legal Exposure: Track the status of the certified class action lawsuit regarding assistant store manager classification in California.
- Capital Allocation: Review the balance between capital expenditures ($265M forecast), stock repurchases, and dividend payments against operating cash flow generation.