Ross Stores, Inc. — Form 10-K Summary
Reporting period: Fiscal 2018, ended February 2, 2019 (52 weeks), compared principally with fiscal 2017, ended February 3, 2018 (53 weeks). The request metadata says “2017 Q4,” but the supplied filing is the fiscal 2018 annual report; the filing’s fourth quarter ended February 2, 2019.
Business context
Ross operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. At year-end, the company had 1,717 stores: 1,480 Ross and 237 dd’s DISCOUNTS. Its model relies on buying branded merchandise opportunistically and selling it at discounts, with frequent inventory deliveries and a “treasure-hunt” shopping experience.
Key financial and operating metrics
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Sales | $14.984 billion | $14.135 billion |
| Sales growth | 6.0% | 9.9% |
| Comparable-store sales growth (52-week basis) | 4% | 4% |
| Cost of goods sold / sales | 71.6% | 71.0% |
| SG&A / sales | 14.8% | 14.5% |
| Earnings before taxes | $2.051 billion | $2.041 billion |
| Net earnings | $1.587 billion | $1.363 billion |
| Diluted EPS | $4.26 | $3.55 |
| Operating cash flow | $2.067 billion | $1.681 billion |
- Net margin was 10.6%, up from 9.6%; pretax margin was 13.7%, down from 14.4%. The implied gross margin was 28.4%, versus 29.0%.
- Fiscal 2018 sales rose 6.0%, driven by 95 net store additions and 4% comparable-store growth. Fiscal 2017 growth also benefited from a 53rd week.
- Cost of goods sold as a share of sales increased about 55 basis points, mainly from higher freight, distribution, buying, and occupancy costs, partly offset by improved merchandise margin. SG&A as a share of sales increased about 30 basis points, primarily due to higher wages.
- Cash and cash equivalents were $1.413 billion; working capital was $1.395 billion and the current ratio was 1.7. Merchandise inventory was $1.750 billion, with packaway inventory at 46% of total, down from 49%.
- Long-term debt was $312 million. The company had no revolver borrowings and reported $600 million available under its revolving facility. It repaid $85 million of notes at maturity during the year.
- Capital expenditures were $414 million. The company repurchased $1.075 billion of shares and paid $337 million in dividends. Fiscal 2018 dividends declared were $0.90 per share.
- Fourth-quarter sales were $4.107 billion and net earnings were $442 million; diluted EPS was $1.20. The comparable prior-year quarter reported sales of $4.068 billion, net earnings of $451 million, and diluted EPS of $1.19. The current-quarter EPS included an approximately $0.07 tax benefit from resolving a tax matter.
Material changes, outlook, and unusual items
- Net earnings increased about 16%, while diluted EPS rose 20%; EPS growth also reflected a lower share count from repurchases. Fiscal 2018 EPS included estimated benefits of $0.70 from tax reform and $0.07 from a favorable tax resolution. Fiscal 2017 EPS included estimated benefits of $0.21 from tax reform and $0.10 from its extra week.
- The effective tax rate fell to approximately 23% from 33%. Management estimated a fiscal 2019 effective tax rate of 23%–24%.
- Management forecast approximately $600 million of fiscal 2019 capital expenditures for stores, technology, and an initial investment in a new distribution center. It expected cash, operating cash flow, trade credit, and available credit to fund planned needs for at least 12 months. No specific sales or earnings guidance is provided in the supplied filing text.
- In March 2019, the board authorized a new two-year, $2.55 billion share-repurchase program and declared a $0.255 quarterly dividend.
- The company planned to adopt lease-accounting guidance in fiscal 2019, estimating recognition of approximately $2.9 billion in lease liabilities and corresponding right-of-use assets; management did not expect a significant earnings or cash-flow effect.
- Operating leases and purchase commitments are substantial: contractual obligations totaled $6.926 billion, including $2.989 billion of operating-lease obligations and $2.571 billion of purchase obligations. A separate lease disclosure lists $3.976 billion of undiscounted minimum payments, including the New York ground lease.
- Key risks include intense retail and e-commerce competition; consumer, weather, and economic variability; inventory buying, markdown, and shortage risks; dependence on desirable branded merchandise; wage and labor pressures; cybersecurity and systems or supply-chain disruptions; tariffs and sourcing exposure; and store-location and expansion execution.
- Class-action litigation, primarily in California and involving wage-and-hour and consumer-protection claims, remained pending. Management stated that resolution of pending cases and other proceedings was not expected to materially adversely affect financial condition, results, or cash flows. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether comparable-store growth and merchandise margins remain resilient as freight and wage costs rise.
- How much EPS growth is supported by underlying operations versus tax benefits and share repurchases.
- Execution and returns on planned store growth, higher capital spending, technology investments, and the new distribution center.
- Inventory quality, packaway conversion, and cash-flow effects from inventory and vendor-payment timing.
- The balance-sheet and disclosure effects of lease-accounting adoption, alongside ongoing lease commitments.
- Developments in pending litigation, tax matters, tariffs, cybersecurity, and supply-chain risks.