Ross Stores, Inc. 10-K Summary (Fiscal Year Ended Jan 29, 2005)
Business Context and Reporting Period
This Annual Report covers the fiscal year ended January 29, 2005. Ross Stores, Inc. operates two chains of off-price retail apparel and home accessories stores: Ross Dress for Less (639 stores) and dd’s DISCOUNTS (10 stores). The company targets value-conscious consumers, offering brand-name merchandise at 20% to 60% below regular department store prices. The filing includes a restatement of consolidated financial statements for fiscal years 2003 and prior to correct accounting for tenant improvement allowances and rent holidays in accordance with GAAP.
Key Financial Metrics
| Metric | Fiscal 2004 | Fiscal 2003 (Restated) |
|---|---|---|
| Sales | $4,239.99 million | $3,920.58 million |
| Net Earnings | $169.90 million | $227.57 million |
| Diluted EPS | $1.13 | $1.47 |
| Operating Cash Flow | $298.16 million | $321.47 million |
| Cost of Goods Sold % of Sales | 77.3% | 74.5% |
| SG&A % of Sales | 15.7% | 16.0% |
| Long-Term Debt | $50.0 million | $50.0 million |
| Working Capital | $411.16 million | $409.51 million |
| Comparable Store Sales | (1)% | 1% |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 8% ($319.4 million) driven by the opening of 81 net new stores, partially offset by a 1% decline in comparable store sales.
- Profitability Decline: Net earnings decreased approximately 25% year-over-year. This was primarily due to a 290 basis point increase in Cost of Goods Sold (COGS) as a percentage of sales, driven by higher markdowns, increased distribution/logistics costs, and the launch of the new dd’s DISCOUNTS concept.
- Impairment Charge: The company recognized a net impairment charge of approximately $15.8 million related to the write-down and subsequent sale of its former corporate headquarters in Newark, California.
- Store Count: Total store count increased from 568 to 649, including the first 10 dd’s DISCOUNTS locations.
Guidance, Outlook, and Risks
- Capital Expenditures: Management forecasts approximately $185 million in capital expenditures for fiscal 2005 to fund new store openings, remodels, and system investments.
- System Implementation: The company implemented a new Core Merchandising System in 2004. While initial difficulties in generating reporting data adversely affected sales and earnings, management believes these issues were remedied by year-end.
- Restatement Impact: The restatement of prior years' financials was necessitated by SEC guidance on operating lease accounting (tenant improvements and rent holidays). Management concluded this was not a material weakness in internal controls.
- Risks: Key risks include the ability to purchase attractive brand-name merchandise at desired discounts, competitive pressures, integration of new supply chain systems, and exposure to the California economy (30% of stores and headquarters located there).
- Dividends: A quarterly cash dividend of $0.05 per share was declared in January 2005.
Investor Verification Checklist
- Restatement Details: Review Note B to understand the specific adjustments made to prior years' financials regarding lease accounting and their impact on retained earnings.
- Merchandising System Recovery: Verify that the new Core Merchandising System is fully operational and that reporting issues have not recurred in subsequent quarters.
- Comparable Store Sales Trend: Monitor the reversal of the 1% decline in comparable store sales to ensure the new store growth strategy is not masking underlying same-store weakness.
- COGS Margins: Track the stabilization of Cost of Goods Sold margins, specifically regarding markdown rates and distribution costs associated with the new dd’s DISCOUNTS concept.
- Debt Covenants: Confirm continued compliance with interest coverage and leverage ratios required by the $50 million term loan and synthetic lease facilities.