Ross Stores, Inc. - Q1 2009 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Ross Stores, Inc., covering the three-month period ended May 2, 2009. Ross is the second-largest off-price apparel and home goods retailer in the United States, operating under the banners "Ross Dress for Less" and "dd's DISCOUNTS." As of the period end, the company operated 974 stores (922 Ross and 52 dd's DISCOUNTS) across 27 states and Guam.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Sales | $1,691.6 million | $1,556.3 million |
| Net Earnings | $91.4 million | $79.5 million |
| Diluted EPS | $0.72 | $0.60 |
| Operating Cash Flow | $240.7 million | $160.8 million |
| Cash & Equivalents | $459.3 million | $305.8 million |
| Long-Term Debt | $150.0 million | $150.0 million |
| Working Capital | $418.4 million | $418.7 million |
| Effective Tax Rate | 39% | 38% |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 8.7% year-over-year, driven by the addition of 56 net new stores and a 3% increase in comparable store sales.
- Profitability: Net earnings rose 15% to $91.4 million. Diluted EPS increased 20% to $0.72, aided by a 5% reduction in weighted average shares due to stock repurchases.
- Margin Expansion: Cost of goods sold (COGS) as a percentage of sales improved by 90 basis points to 75.0%, driven by higher merchandise gross margins and reduced freight costs. Selling, general, and administrative (SG&A) expenses increased slightly as a percentage of sales (16.1% vs 15.9%) primarily due to the absence of a one-time lease settlement gain in the prior year.
- Liquidity: Cash and cash equivalents increased by $137.9 million during the quarter. Operating cash flow surged to $240.7 million, largely due to improved accounts payable leverage (74% vs 64% in the prior year) resulting from faster inventory turns.
- Capital Allocation: The company repurchased approximately 2.2 million shares for $77.2 million and paid $14.0 million in dividends.
Guidance, Outlook, and Risks
- Outlook: Management expects macro-economic pressures to continue. The strategy focuses on maintaining tight controls over inventory levels and operating expenses to maximize profitability. Capital requirements for fiscal 2009 are forecast at approximately $190 million, expected to be funded by operating cash flows.
- Dividends: A quarterly cash dividend of $0.11 per share was declared in May 2009, payable June 30, 2009.
- Risks: Key risks include the severity and duration of the recession, competitive pressures, supply chain disruptions, and the availability of attractive brand-name merchandise at desirable discounts. The company notes that 26% of its stores and key distribution centers are located in California, creating regional concentration risk.
- Legal: The company is involved in class action lawsuits regarding wage and hour claims. Management does not expect these proceedings to have a material adverse effect on financial condition.
- Investments: The company holds approximately $35.4 million in investments. While some securities have unrealized losses due to market downturns, management does not consider them other-than-temporarily impaired.
Investor Verification Checklist
- Verify the sustainability of the 3% comparable store sales growth in a recessionary environment.
- Monitor the effectiveness of inventory management strategies given the high level of purchase obligations ($1.04 billion).
- Review the status of pending wage and hour class action litigation for potential reserve adjustments.
- Assess the impact of the $600 million revolving credit facility covenant compliance, though currently in good standing.
- Track the execution of the $190 million capital expenditure plan for new store openings and system upgrades.