Ross Stores, Inc. — Form 10-Q Summary
Period clarification: The request metadata says 2017 Q3, but the filing is for the quarter ended November 3, 2018. Comparatives are for the three and nine months ended October 28, 2017. Financial statements are unaudited.
Business context and results
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. At quarter-end it had 1,720 stores, including 1,483 Ross and 237 dd’s DISCOUNTS locations, versus 1,627 a year earlier.
| Metric | Three months ended Nov. 3, 2018 | Three months ended Oct. 28, 2017 | Nine months ended Nov. 3, 2018 | Nine months ended Oct. 28, 2017 |
|---|---|---|---|---|
| Sales | $3,549.6m | $3,328.9m | $10,876.2m | $10,066.9m |
| Sales growth | 6.6% | 7.8% | 8.0% | 7.6% |
| Comparable-store sales growth | 3% | 4% | 3% | 4% |
| Net earnings | $338.1m | $274.4m | $1,145.8m | $912.0m |
| Diluted EPS | $0.91 | $0.72 | $3.06 | $2.36 |
| Gross margin | 28.2% | 28.8% | 28.9% | 29.3% |
| SG&A as a percentage of sales | 15.8% | 15.5% | 15.1% | 14.8% |
| Net margin | 9.5% | 8.2% | 10.5% | 9.1% |
Cash flow, balance sheet, and liquidity
- For the nine months, operating cash flow was $1,450.1m, investing cash outflow was $292.6m, and financing cash outflow was $1,099.1m. Cash, cash equivalents, and restricted cash increased $58.3m to $1,411.6m; unrestricted cash and equivalents were $1,349.2m at quarter-end.
- Capital expenditures were $293.4m for the nine months. Merchandise inventory was $1,979.1m, up from $1,641.7m at fiscal year-end; management cited timing of inventory receipts as a driver of operating cash flow. Packaway inventory was 41% of total inventory, versus 49% at fiscal year-end.
- Total debt was $397.3m, including $85.0m due in December 2018 and $312.3m classified as long-term. The $600m revolving credit facility was undrawn and available through April 2021. The company reported compliance with debt covenants.
- Management said available cash, operating cash flow, bank lines, and trade credit were adequate for operating needs and planned investments, debt repayment, repurchases, and dividends for at least the next 12 months.
Material changes and management commentary
- Sales growth reflected 93 net new stores since the prior-year comparison period and 3% comparable-store growth. Comparable-store growth was lower than the prior-year 4% rate.
- Gross margin declined 60 basis points in the quarter and 40 basis points year to date. Higher freight, distribution, and buying costs were partly offset by improved merchandise margin. SG&A rates rose, primarily due to wage investments.
- Net earnings rose 23% in the quarter and 26% year to date; diluted EPS rose 26% and 30%, respectively. Management attributed the earnings improvement primarily to lower taxes following U.S. tax reform, as well as reduced diluted share counts from repurchases. The tax benefit contributed $0.16 per diluted share for the quarter and $0.51 year to date.
- The effective tax rate was 24% for both 2018 periods, compared with 38% for the prior-year quarter and 37% for the prior-year nine-month period. Management expected a 22%–23% effective tax rate for fiscal 2018 and approximately $440m in fiscal-2018 capital expenditures. The filing provides no specific sales or earnings forecast.
- The company repurchased 9.4m shares for $806.5m during the nine months and paid $253.9m in dividends. At quarter-end, $268.5m remained under the fiscal-2018 repurchase authorization. A $0.225-per-share dividend was declared in November, payable December 28, 2018.
Risks, contingencies, and unusual items
- After quarter-end, the IRS resolved uncertain tax positions related to fiscal 2015. The company expected to record an approximately $26.2m tax benefit in the quarter ending February 2, 2019, and reduce unrecognized tax benefits by approximately $53.3m, including interest and penalties. Unrecognized tax benefits totaled $130.5m at quarter-end.
- Pending class-action matters, primarily involving employment and consumer-protection allegations, and other ordinary-course legal proceedings remain unresolved. Management did not expect their resolution to have a material adverse effect.
- The company had approximately $3.0bn of purchase obligations and $2.97bn of operating-lease rent obligations in its contractual-obligations table, plus a $967.0m New York buying-office ground-lease obligation. It separately described current undiscounted minimum noncancelable operating-lease commitments as approximately $3.9bn.
- The new lease accounting standard was scheduled for adoption in fiscal 2019. Management expected a material increase in reported assets and liabilities because of the company’s leases, but did not expect a significant effect on earnings, equity, or cash flows.
- Key stated risks include retail competition, shifts in consumer demand and weather, inventory and markdown management, merchandise availability, wage and supply-chain pressures, cybersecurity or systems disruptions, store-site availability, legal and tax matters, and changes in tax or tariff policy. Management cautioned that current sales and margin performance may not continue.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is Q3 2018, not Q3 2017.
- Assess whether comparable-store growth and gross margins can hold up amid higher freight and operating costs.
- Separate recurring earnings from tax-related benefits, including the expected post-quarter IRS settlement and the lower tax-rate effect.
- Review inventory growth, packaway levels, and the timing of receipts and vendor payments for potential cash-flow implications.
- Consider the December 2018 debt maturity, lease obligations, planned capital expenditures, and continued share repurchases and dividends when evaluating liquidity.