Business context and reporting period
Ross Stores, Inc. operates Ross Dress for Less and dd’s DISCOUNTS off-price retail chains. This unaudited Form 10-Q covers the three and nine months ended November 2, 2013, compared with periods ended October 27, 2012. Although the request metadata says “2012 Q3,” the filing itself is for fiscal 2013 Q3. Ross had 1,154 stores and dd’s DISCOUNTS had 131, for 1,285 stores total.
Financial performance and liquidity
| Metric | Three months | Nine months |
|---|---|---|
| Sales | $2.398 billion, up 6.0% | $7.489 billion, up 7.6% |
| Comparable-store sales growth | 2% | 3% |
| Net earnings | $171.6 million, up 7.6% | $619.4 million, up 12.6% |
| Diluted EPS | $0.80, versus $0.72 | $2.86, versus $2.46 |
| Gross margin | 27.2%, versus 27.1% | 28.3%, versus 27.9% |
| Net margin | 7.2%, versus 7.1% | 8.3%, versus 7.9% |
| Operating cash flow | $681.2 million for nine months, versus $646.3 million | |
| Capital expenditures | $423.2 million for nine months, versus $255.3 million |
At November 2, 2013, cash and cash equivalents were $372.3 million, short-term investments $12.0 million, and total current assets $2.050 billion against current liabilities of $1.497 billion. Long-term debt was $150 million; the $600 million revolving facility had no borrowings outstanding and remained available. The company reported covenant compliance. Nine-month financing cash use was $518.8 million, including $421.3 million of share repurchases and $111.4 million of dividends. Cash declined $274.5 million over the nine months.
Material changes versus the prior comparable periods
- Sales growth slowed from 10.6% to 6.0% for the quarter and from 12.1% to 7.6% year to date; comparable-store growth was also lower, at 2% and 3% versus 6% and 7%.
- Net earnings and diluted EPS increased in both periods. Management attributed EPS growth partly to lower weighted-average diluted shares from repurchases.
- Cost of goods sold improved as a share of sales by about 5 basis points for the quarter and 40 basis points year to date, mainly from stronger merchandise margins. SG&A rose 10 basis points as a share of quarterly sales but declined 5 basis points year to date.
- Capital spending rose substantially, and inventory increased to $1.430 billion from $1.343 billion at October 27, 2012. The company said inventory, net of accounts payable, used about $82 million of cash year to date, compared with about $56 million.
- The store base increased by 80 net locations from the prior-year comparison date. Share repurchases and dividends also increased year over year.
Outlook, risks, contingencies, and unusual items
- Management forecast approximately $585 million of fiscal 2013 capital expenditures, with some distribution- and store-related spending shifted from 2013 to 2014. Planned spending includes new distribution centers, store openings and improvements, headquarters relocation, and information technology investments.
- Management expected a fiscal 2013 effective tax rate of approximately 38% and said cash, operating cash flow, bank credit lines, and trade credit should meet operating, investment, repurchase, and dividend needs for at least the next 12 months. No specific sales or earnings guidance was provided in this filing.
- In October 2013, the company obtained the right to purchase its New York buying-office building for $222 million, subject to closing conditions by September 20, 2014. It paid a 10% deposit; if the transaction does not close, the deposit is forfeited, with no further liability. Financing alternatives were under review.
- Class-action employment litigation and other ordinary-course legal and regulatory proceedings were pending. Management did not expect their resolution to materially adversely affect financial condition, results, or cash flows.
- Unrecognized tax-benefit reserves were $100.3 million, including interest and penalties. A statute-of-limitations lapse could reduce tax expense by up to $4.9 million over the next 12 months. Management did not expect ongoing state tax audits to have a material impact.
- Key risks include competition and consumer-demand changes, merchandise availability, supply-chain and systems disruptions, weather, store and distribution-center expansion execution, cost control, and regional concentration: 25% of stores and several facilities were in California.
Important facts for investors to verify
- Confirm the intended reporting period: the filing covers fiscal 2013 Q3, notwithstanding the “2012 Q3” metadata.
- Track comparable-store sales and merchandise margins, as growth slowed from the prior year and management cautioned that current margins may not continue.
- Assess the pace and returns of elevated capital spending, inventory growth, and planned distribution-center expansion.
- Monitor the proposed $222 million building purchase, its financing, and the effect on liquidity and capital allocation.
- Review continued stock repurchases and dividends against cash generation, debt, contractual obligations, and the $2.317 billion in disclosed operating-lease obligations.
- Note that the interim financial statements were unaudited; the independent accountant performed a review, not an audit.