Ross Stores, Inc. — Form 10-Q Summary
Reporting period: Three months ended April 30, 2011, compared with the three months ended May 1, 2010. The filing’s reported period is 2011 Q1, despite the request metadata indicating 2010 Q1. Ross operated 998 Ross Dress for Less and 70 dd’s DISCOUNTS stores at quarter-end. Financial statements are unaudited interim statements; the independent accountant performed a review, not an audit.
Financial performance
| Metric | Q1 2011 | Prior-year period | Change |
|---|---|---|---|
| Sales | $2,074.6 million | $1,934.8 million | +7.2% |
| Comparable-store sales | +3% | +10% | Growth slowed |
| Earnings before taxes | $281.7 million | $231.8 million | +21.5% |
| Net earnings | $173.0 million | $142.3 million | +21.5% |
| Diluted EPS | $1.48 | $1.16 | +27.6% |
| Operating cash flow | $41.1 million | $189.2 million | Down $148.1 million |
| Capital expenditures | $70.1 million | $35.5 million | Nearly doubled |
Gross margin was approximately 28.6%, up from 27.3%; cost of goods sold fell to 71.4% of sales from 72.7%. SG&A declined to 14.9% of sales from 15.2%. Pretax margin increased to 13.6% from 12.0%, and net margin to 8.3% from 7.4%. Management attributed the gross-margin improvement primarily to higher merchandise margin, with additional benefit from occupancy, distribution, and buying costs; higher freight costs partly offset these gains.
Financial position and liquidity
- Cash and cash equivalents were $671.0 million at April 30, 2011, versus $823.7 million a year earlier and $833.9 million at January 29, 2011. The quarter’s cash decline was $162.9 million.
- Merchandise inventory was $1,172.7 million, up from $908.1 million a year earlier. Packaway inventory was 48% of total inventory, compared with 47% at fiscal year-end; management said packaway fluctuations were not expected to materially affect liquidity.
- Current assets were $1,997.2 million and current liabilities were $1,238.8 million. The company had $150 million of long-term senior notes and no borrowings under its $600 million revolving facility. It reported covenant compliance.
- Operating cash flow fell mainly because of cash invested in additional packaway inventory and changes in other working-capital items. Financing cash use included $112.5 million of share repurchases and $25.9 million of dividends paid.
- Ross forecast fiscal 2011 capital expenditures of approximately $380 million to $390 million and expected to fund them from available cash and operating cash flow. Management said available cash, operating cash flow, bank facilities, and trade credit were adequate for at least the next 12 months.
Material changes, outlook, and risks
- Sales growth reflected 47 net new stores over the year and 3% comparable-store growth. The company opened 16 stores and closed three during the quarter. Diluted EPS growth also benefited from a 5% reduction in weighted-average diluted shares, largely due to repurchases.
- In January 2011, the board authorized a new two-year, $900 million repurchase program for fiscal 2011 and 2012. In May, it declared a $0.22-per-share dividend payable June 30, 2011. The filing reports a fiscal 2011 expected effective tax rate of approximately 38%; the quarter’s rate was approximately 39%.
- In March, Ross replaced its existing $600 million revolving facility with a new facility expiring in March 2016. A $300 million sublimit applies to standby letters of credit; $219.4 million of that sublimit was available at quarter-end.
- Ross purchased a 449,000-square-foot Riverside, California warehouse for $20.5 million for packaway storage. Management stated that gross margins may not persist at first-quarter levels and that its strategies may not sustain sales or earnings growth.
- Key risks include retail competition and consumer demand, availability of desirable branded merchandise, supply-chain disruptions, execution of store growth and merchandising systems, inventory and markdown management, and regional exposure to natural disasters. The company noted that 26% of its stores and several major facilities are in California.
- Pending California wage-and-hour class actions and other ordinary-course litigation remained unresolved. Management did not expect their resolution to materially adversely affect financial condition, results, or cash flows. Unrecognized tax benefits were $44.5 million; a statute-of-limitations lapse could reduce tax expense by up to $1.3 million over the next 12 months.
- Contractual obligations totaled $3,674.9 million, including $1,984.0 million of rent obligations and $1,383.9 million of purchase obligations. The filing also describes a $56 million residual-value guarantee related to a synthetic lease and an accrued estimated shortfall of approximately $4.6 million.
Investor verification priorities
- Confirm the reporting-period discrepancy: the filing covers Q1 2011, not Q1 2010.
- Track whether comparable-store sales and improved gross margins persist, particularly as freight, markdown, and inventory conditions change.
- Monitor packaway inventory, vendor-payment leverage, and operating cash flow against the prior-year period.
- Review execution of the $380 million–$390 million capital plan, store expansion, and the $900 million repurchase authorization alongside liquidity needs.
- Follow developments in the wage-and-hour litigation, tax audits and reserves, and the synthetic-lease residual-value exposure.