Ross Stores, Inc. — Form 10-K Summary
Reporting period: Fiscal 2017, ended February 3, 2018. The year had 53 weeks; fiscal 2016, ended January 28, 2017, had 52 weeks. Although the request metadata refers to 2016 Q4, this filing reports fiscal 2017 and includes quarterly data for both fiscal 2017 and fiscal 2016.
Business context
Ross operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. At year-end it had 1,622 stores: 1,409 Ross locations and 213 dd’s DISCOUNTS locations. Management attributes results to execution of its off-price model and ongoing customer demand for branded merchandise at discounts.
Financial performance and position
| Metric | Fiscal 2017 | Fiscal 2016 |
|---|---|---|
| Sales | $14.135 billion | $12.867 billion |
| Comparable-store sales growth | 4% | 4% |
| Net earnings | $1.363 billion | $1.118 billion |
| Diluted EPS | $3.55 | $2.83 |
| Cash from operations | $1.681 billion | $1.559 billion |
- Sales rose 9.9%, reflecting 89 net new stores, 4% comparable-store growth, and the extra fiscal week. Net earnings increased about 22%; diluted EPS increased 25%, also benefiting from share repurchases.
- Cost of goods sold was 71.0% of sales, implying a 29.0% gross margin, versus 71.3% and 28.7% in fiscal 2016. SG&A was 14.5% of sales versus 14.7%; pretax margin was 14.4% versus 13.9%, and net margin was 9.6% versus 8.7%.
- Fiscal 2017 cash from investing activities was $353 million used, including $371 million of capital expenditures. Financing activities used $1.149 billion, including $875 million of share repurchases and $248 million of dividends. Cash increased $179 million to $1.290 billion.
- At year-end, working capital was $1.225 billion and the current ratio was 1.6:1. Long-term debt was $397 million, including $85 million current; the company had no borrowings under its $600 million revolving facility. Operating lease commitments totaled approximately $3.657 billion, undiscounted.
- Inventory was $1.642 billion, up from $1.513 billion; packaway inventory was 49% of total inventory in both years. Total stores grew from 1,533 to 1,622.
Quarterly performance and notable changes
Fiscal 2017 fourth-quarter sales were $4.068 billion, versus $3.510 billion in the prior-year quarter; net earnings were $451 million versus $301 million, and diluted EPS was $1.19 versus $0.77. Fourth-quarter results included a $0.21-per-share benefit from tax reform and a $0.10-per-share benefit from the 53rd week. Fiscal-year EPS comparisons are therefore affected by both items.
The Tax Cuts and Jobs Act produced $80.1 million of recorded fiscal 2017 tax benefits: $24.9 million from the blended tax rate and $55.2 million from remeasurement of deferred taxes. These amounts were provisional. The fiscal 2017 effective tax rate was approximately 33%, compared with 37%; management anticipated a 24%–25% rate for fiscal 2018.
Outlook, risks and contingencies
- Management forecast approximately $475 million of fiscal 2018 capital expenditures, funded from cash and operating cash flow, and expected existing cash, operating cash flow, credit lines and trade credit to meet needs for at least 12 months.
- The company planned continued store growth, primarily in existing markets while also expanding in newer markets. The filing provides no specific fiscal 2018 sales or earnings guidance.
- Key risks include intense competition, shifts in consumer demand, weather, inventory markdowns and shortage, availability of attractive branded merchandise, import and tariff changes, supply-chain or technology disruption, cybersecurity incidents, labor costs, and execution of new-store growth.
- Approximately 49% of inventory was packaway; management notes that poor alignment with later customer demand could require markdowns and affect cash flow. Freight costs increased as a percentage of sales in fiscal 2017, partly offsetting gross-margin improvements.
- Pending class-action matters, primarily involving wage-and-hour and consumer-protection claims, and other proceedings were disclosed. Management did not expect their resolution to materially adversely affect financial condition, results or cash flows.
- Upcoming accounting changes include revenue-recognition adoption in fiscal 2018, with an expected approximately $20 million after-tax retained-earnings adjustment, and lease accounting adoption in fiscal 2019, expected to materially increase both assets and liabilities.
Most important facts for investors to verify
- Separate underlying operating growth from the 53rd-week contribution and the one-time tax-reform benefits when assessing earnings and EPS trends.
- Track comparable-store sales, merchandise margin, freight costs, markdowns, and inventory growth, especially the substantial packaway share.
- Assess the cash demands of planned capital spending, repurchases and dividends against operating cash flow and the near-term $85 million debt maturity.
- Consider lease commitments and the expected balance-sheet effects of the new lease standard alongside reported debt.
- Monitor final tax-reform accounting adjustments, tax audits and litigation developments; the filing describes the tax benefits as provisional.