ROST

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 and six-month periods ended July 30, 2005. Ross is the second-largest off-price apparel and home goods retailer in the United States, operating 695 stores (682 Ross Dress for Less and 13 dd's DISCOUNTS) as of the period end. The financial statements for the prior year period (ended July 31, 2004) have been restated to conform to current accounting standards regarding operating leases and short-term investments.

Key Financial Metrics

Note: Working Capital calculated as Current Assets less Current Liabilities.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 16.2% for the quarter and 14.8% for the six-month period compared to the prior year. This growth was driven by the opening of 79 net new stores and a 7% increase in comparable store sales for the quarter (5% for the six months).
• Profitability: Net earnings increased 31% for the quarter and 15% for the six months. Diluted EPS rose to $0.29 from $0.21 (quarter) and $0.62 from $0.53 (six months), aided by share repurchases reducing the share count.
• Margin Pressure: Cost of goods sold (COGS) as a percentage of sales increased by approximately 150 basis points for the quarter and 110 basis points for the six months. This was primarily due to lower merchandise gross margins (higher markdowns) and increased distribution/logistics costs.
• Restatement Impact: Prior year figures were restated due to changes in accounting for tenant improvement allowances, rent holidays, and the classification of short-term investments. The restatement reduced prior year net earnings by $361,000 for the quarter and $732,000 for the six months.

Guidance, Outlook, and Risks

• Capital Expenditures: The Company forecasts approximately $185 million in capital expenditures for fiscal 2005 to fund new store openings, remodels, and distribution center investments.
• Dividends: A quarterly cash dividend of $0.05 per share was declared in August 2005, payable in September 2005.
• Stock Repurchases: The Company repurchased approximately 3.2 million shares for $89.0 million during the six-month period. As of July 30, 2005, approximately $86 million remained available under the $350 million repurchase program.
• Risks and Contingencies:
  • Legal: The Company is involved in various legal proceedings, including class action lawsuits regarding employee wage and hour classifications in California. Management does not expect a material adverse effect.
  • Geographic Concentration: 29% of stores and corporate headquarters are in California, exposing the company to regional economic downturns or natural disasters.
  • Off-Balance Sheet: Significant synthetic lease obligations exist for distribution centers in South Carolina ($87.3 million) and California ($70 million), with residual value guarantees totaling $130.2 million.

Investor Verification Checklist

• Restatement Details: Verify the specific impact of the lease accounting restatement (Note B) on year-over-year comparisons, particularly regarding operating cash flows and asset values.
• Margin Trends: Monitor the sustainability of gross margins given the reported increase in markdowns and distribution costs.
• Synthetic Lease Obligations: Review the terms and residual value guarantees associated with the $157.3 million in synthetic lease facilities for distribution centers.
• Comparable Store Sales: Assess the 7% comparable store sales growth rate to determine if it is sustainable in the current competitive off-price retail environment.
• Capital Allocation: Track the remaining $86 million in the stock repurchase program and the execution of the $185 million capital expenditure plan.