Ross Stores, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2021. The request metadata says “2020 Q2,” but the filing itself reports fiscal 2021 Q2; the comparable quarter ended August 1, 2020. Dollar amounts below are in millions unless stated otherwise.
Business context and results
Ross operates Ross Dress for Less and dd’s DISCOUNTS off-price retail chains. At quarter-end it had 1,896 stores: 1,611 Ross and 285 dd’s DISCOUNTS.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Sales | $4,805 | $2,685 | $9,321 | $4,527 |
| Comparable-store sales | +15% vs. 2019 | −12%* | +14% vs. 2019 | Not meaningful* |
| Net earnings (loss) | $494 | $22 | $971 | $(284) |
| Diluted EPS | $1.39 | $0.06 | $2.73 | $(0.81) |
| Net earnings margin | 10.3% | 0.8% | 10.4% | (6.3)% |
*The 2020 comparison is affected by pandemic-related store closures; 2020 Q2 comparable sales cover reopened stores only, while first-half comparable sales were not meaningful. Management considers 2019 a more relevant comparison: sales grew 20.7% in Q2 and 19.9% in the first half versus the corresponding 2019 periods.
Financial condition and cash flow
- Q2 cost of goods sold was 71.0% of sales and SG&A was 14.9%; pretax margin was 13.7%. First-half figures were 70.9%, 14.9%, and 13.8%, respectively.
- First-half operating cash flow was $1,345, compared with $172 in 2020 and $1,083 in 2019. Capital expenditures were $254; investing cash flow was $(254). Financing cash flow was $(416), including dividends and share repurchases.
- Cash and cash equivalents were $5,569 at July 31, 2021 (plus $60 of restricted cash). Total debt was approximately $2,515, including $65 current debt; no revolver borrowings were outstanding. The $800 revolving facility remained available through July 2024.
- Inventory was $1,751, up from $1,509 at January 30, 2021. Accounts payable was $2,589; management cited 148% accounts-payable leverage, versus 90% a year earlier, reflecting faster inventory turnover and longer payment terms.
- Operating lease liabilities totaled approximately $3,111. Total contractual obligations were $13,024, including $5,523 of purchase obligations, primarily merchandise orders and other commitments.
Changes, outlook, and risks
Sales and earnings rebounded sharply from the prior-year period, when pandemic closures curtailed operations. All stores were open throughout the first half of 2021. Against 2019, first-half diluted EPS rose 19%; management attributed the improvement to higher sales and share repurchases, partly offset by higher SG&A and interest expense.
Management said Q2 sales benefited from government stimulus, increased vaccinations, easing restrictions, pent-up demand, and merchandising execution. It remained optimistic about the remainder of fiscal 2021 but did not provide specific sales or earnings guidance. It expected approximately 65 new stores in fiscal 2021 and a return to about 100 annual openings in 2022; fiscal 2021 capital expenditures were projected at approximately $650.
Management expects freight costs to rise further, while higher distribution costs, wages, and COVID-related operating expenses are expected to continue through fiscal 2021. It highlighted uncertainty around stimulus benefits, COVID-19 duration and variants, consumer demand, and industry supply-chain congestion. Other disclosed risks include inventory and markdown management, competition, merchandise availability, cyber and system disruptions, store-site availability, and legal or tax matters.
The company resumed quarterly dividends in March 2021; the Q2 dividend was $0.285 per share, and an additional $0.285 dividend was declared in August for payment September 30, 2021. In May 2021, the board authorized up to $1.5 billion of repurchases through fiscal 2022. The company repurchased approximately $176 of shares during the first half. Management said available cash, operating cash flow, credit facilities, and trade credit should cover operating needs and planned investments, debt repayment, repurchases, and dividends for at least 12 months.
Pending employment, consumer-protection, and other legal proceedings were described as not expected by management to have a material adverse effect. Unrecognized tax benefits were $75.6; management said the amount could decrease by up to $11.1 over the next 12 months. The interim financial statements were reviewed by Deloitte, not audited.
Important facts for investors to verify
- Confirm the correct reporting period: this is a quarter ended July 31, 2021, not 2020 Q2.
- Assess how much of the strong sales recovery depended on stimulus, reopening effects, pent-up demand, and comparisons with pandemic-affected periods.
- Monitor freight, distribution, wage, and COVID-related cost pressures and their effect on merchandise margins and profitability.
- Review inventory levels, packaway inventory (30% of inventory), accounts-payable leverage, and supplier payment terms for sustainability.
- Track planned capital spending, store openings, repurchases, dividends, debt maturities, and liquidity against actual cash generation.
- Follow COVID-19 and supply-chain developments, along with pending litigation and tax uncertainties.