Ross Stores, Inc. (ROST) - 10-K Summary
Business Context and Reporting Period
Company: Ross Stores, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: January 30, 2010 (Fiscal 2009)
Business Model: Off-price retailer operating two chains: Ross Dress for Less (953 stores) and dd's DISCOUNTS (52 stores). The company sells first-quality, in-season, name-brand apparel and home accessories at discounts of 20% to 70% off regular prices.
Key Financial Metrics (Fiscal 2009)
| Metric | Fiscal 2009 | Fiscal 2008 | Change |
|---|---|---|---|
| Net Sales | $7,184.2 million | $6,486.1 million | +10.8% |
| Net Earnings | $442.8 million | $305.4 million | +45.0% |
| Diluted EPS | $3.54 | $2.33 | +52.0% |
| Gross Margin | 25.8% | 23.6% | +220 bps |
| Operating Margin (Pre-tax) | 10.0% | 7.6% | +240 bps |
| Operating Cash Flow | $888.4 million | $583.4 million | +52.3% |
| Long-Term Debt | $150.0 million | $150.0 million | 0% |
| Cash & Equivalents | $768.3 million | $321.4 million | +139.0% |
| Comparable Store Sales | +6.0% | +2.0% | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 10.8% driven by a 6% increase in comparable store sales and the opening of 49 net new stores (56 opened, 7 closed).
- Margin Expansion: Cost of goods sold as a percentage of sales decreased by 230 basis points to 74.2%. This was driven by a 170 basis point increase in merchandise gross margin, lower shortage rates, and reduced freight and distribution costs.
- Expense Management: Selling, general, and administrative (SG&A) expenses decreased as a percentage of sales by 20 basis points to 15.7%, primarily due to leverage on store operating expenses.
- Liquidity: Cash and cash equivalents more than doubled to $768.3 million, fueled by strong operating cash flows of $888.4 million.
Guidance, Outlook, and Risks
Outlook & Strategy: Management plans to maintain tight controls on inventory levels and operating expenses to maximize profitability in 2010. The company forecasts capital requirements of approximately $215 million for 2010 to fund new store openings, renovations, and system investments.
Capital Allocation:
- Dividends: Quarterly dividend increased to $0.16 per share (declared Jan 2010).
- Buybacks: Board approved a new two-year, $750 million stock repurchase program for fiscal 2010 and 2011.
Risks & Contingencies:
- Legal: Pending class action lawsuits regarding wage and hour claims (meal/rest breaks, overtime) in California. Management does not expect a material adverse effect.
- Operational: Risks include supply chain disruptions, availability of brand-name merchandise at desirable discounts, and economic downturns affecting consumer spending.
- Geographic Concentration: 26% of stores, corporate headquarters, and two distribution centers are located in California, exposing the company to regional economic or natural disaster risks.
Investor Verification Checklist
- Inventory Valuation: Verify the adequacy of reserves for "packaway" inventory (38% of total inventory) and shortage reserves given the off-price model.
- Comparable Store Sales Sustainability: Assess whether the 6% comparable store sales growth is sustainable given the challenging macro-economic environment.
- Legal Exposure: Monitor the status of pending California wage and hour class action litigation.
- Capital Expenditures: Confirm execution of the $215 million capital plan for new store openings and system upgrades.
- Debt Covenants: Verify continued compliance with financial covenants on the $150 million senior notes and $600 million revolving credit facility.