Ross Stores, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended July 29, 2017; comparisons are to the periods ended July 30, 2016. The interim financial statements are unaudited and were reviewed by Deloitte & Touche. Ross operates Ross Dress for Less and dd’s DISCOUNTS off-price retail stores.
Financial performance
| Metric | Three months ended July 29, 2017 | Six months ended July 29, 2017 | Comparable prior-year period |
|---|---|---|---|
| Sales | $3.432 billion | $6.738 billion | $3.181 billion; $6.270 billion |
| Sales growth | 7.9% | 7.5% | — |
| Comparable-store sales growth | 4% | 4% | 4%; 3% |
| Net earnings | $316.5 million | $637.6 million | $281.9 million; $572.5 million |
| Diluted EPS | $0.82 | $1.64 | $0.71; $1.44 |
| Net earnings as a percentage of sales | 9.2% | 9.5% | 8.9%; 9.1% |
| Operating cash flow | — | $797.9 million | $779.6 million |
| Capital expenditures | — | $169.3 million | $147.4 million |
Cost of goods sold was 70.5% of sales in both current periods, compared with 70.8% in the prior-year quarter and 70.6% in the prior-year six-month period. SG&A was 14.5% and 14.4% of sales, respectively, versus 14.8% and 14.5%. Management attributed the improvement in cost of goods sold rates to merchandise margin and occupancy/distribution costs, partly offset by higher freight and buying costs. SG&A rates benefited partly from a nonrecurring legal-cost benefit and were partly offset by higher wages.
Financial position, liquidity, and capital allocation
- At July 29, 2017, cash and cash equivalents were $1.151 billion; current assets were $3.004 billion and current liabilities were $1.829 billion.
- Long-term debt was $396.7 million, consisting of senior notes with principal totaling $400 million and maturities in 2018, 2021, and 2024. The company reported compliance with debt covenants.
- A $600 million revolving credit facility was available through April 2021, with no borrowings or facility letters of credit outstanding. Management said available cash, operating cash flow, bank lines, and trade credit were adequate for operating needs and planned investments, buybacks, and dividends for at least 12 months.
- Six-month financing cash outflow was $589.1 million, including $430.1 million of common-stock repurchases and $125.0 million of dividends paid. The company expected to repurchase $875 million of stock in fiscal 2017 under its two-year $1.75 billion authorization.
- Fiscal 2017 capital expenditures were forecast at approximately $400 million. The August 2017 dividend declaration was $0.16 per share, payable September 29, 2017.
- Total contractual obligations were $6.457 billion, including $2.581 billion of operating-lease rent obligations and $2.410 billion of purchase obligations. The company also disclosed approximately $3.6 billion of undiscounted minimum commitments under noncancelable operating leases.
Changes, outlook, and notable items
- Sales growth reflected 88 net new stores versus the year-earlier period and comparable-store growth. The chain had 1,589 stores at quarter-end, including 1,384 Ross and 205 dd’s DISCOUNTS locations.
- Diluted EPS increased to $0.82 for the quarter and $1.64 for the half year; management cited higher earnings and lower weighted-average diluted shares, reflecting stock repurchases.
- Management forecast a 37%–38% effective tax rate for fiscal 2017 and approximately $400 million of capital expenditures. It did not provide specific sales or earnings guidance in this filing.
- Adoption of stock-compensation guidance reduced the six-month tax provision by $15.1 million through excess tax benefits; management noted future effects could be material. The related change to accounting for forfeitures reduced opening retained earnings by $1.1 million, net of tax.
- Upcoming standards: revenue guidance was expected to change the timing of gift-card breakage recognition and presentation of estimated sales-return allowances; lease guidance was expected to materially increase both balance-sheet assets and liabilities, without significant earnings or cash-flow effects, according to management.
- Pending class-action suits primarily involve California wage-and-hour/employment and consumer-protection allegations, alongside other ordinary-course proceedings. Management did not expect pending matters to have a material adverse effect. Tax audits were ongoing; management did not expect a material impact, and unrecognized tax benefits could decrease, reducing tax expense by up to $3.1 million within 12 months.
Key facts for investors to verify
- Whether 4% comparable-store growth and current merchandise margins persist; management cautioned that margins and sales growth may not continue.
- How much of the SG&A improvement came from the stated nonrecurring legal-cost benefit, and the effect of wage and freight pressures.
- Execution of the planned fiscal 2017 store, capital-expenditure, and $875 million repurchase programs, alongside dividend payments and liquidity needs.
- The future effects of stock-based compensation tax benefits and adoption of the revenue and lease accounting standards.
- Developments in litigation and tax matters, and the scale of lease and purchase commitments relative to future cash flows.