Business context and reporting period
Ross Stores, Inc. operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. This is a fiscal-year 2019 Form 10-K for the year ended February 1, 2020 (52 weeks), not a standalone 2018 Q4 filing. Fiscal 2018 ended February 2, 2019 and also comprised 52 weeks.
At year-end, Ross operated 1,546 stores and dd’s DISCOUNTS 259, for 1,805 total. The company opened 98 stores and closed 10 during fiscal 2019. It reported one operating segment.
Financial results and key metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Sales | $16.039 billion | $14.984 billion | +7.0% |
| Comparable-store sales growth | 3% | 4% | Down 1 percentage point |
| Cost of goods sold / sales | 71.9% | 71.6% | Up 0.35 percentage point |
| SG&A / sales | 14.7% | 14.8% | Down 0.10 percentage point |
| Earnings before taxes | $2.164 billion | $2.051 billion | +5.5% |
| Net earnings | $1.661 billion | $1.587 billion | +4.6% |
| Diluted EPS | $4.60 | $4.26 | +8% |
| Cash from operations | $2.172 billion | $2.067 billion | +5.1% |
Full-year net margin was 10.4%, compared with 10.6% in fiscal 2018; pretax margin was 13.5%, versus 13.7%. Cost of goods sold as a percentage of sales increased mainly from higher distribution and freight costs, partly offset by improved merchandise margin and lower buying costs. SG&A leverage on higher sales partly offset these pressures. The effective tax rate was approximately 23% in both years; fiscal 2019 included an approximately $10 million tax benefit from resolving a state tax matter.
Fiscal 2019 fourth-quarter sales were $4.413 billion versus $4.107 billion in the prior-year quarter; net earnings were $456.1 million versus $441.7 million, and diluted EPS was $1.28 versus $1.20. The filing’s quarterly data is unaudited.
Cash and cash equivalents were $1.351 billion at year-end, versus $1.413 billion a year earlier. Merchandise inventory was $1.832 billion, up from $1.750 billion. Capital expenditures were $555.5 million, up from $413.9 million, largely reflecting distribution and technology investments. Cash used in financing was $1.683 billion, including $1.275 billion of common-stock repurchases and $369.8 million of dividends.
Reported long-term debt was $312.9 million: $65 million of 6.53% notes due 2021 and $250 million of 3.375% notes due 2024, net of discounts and issuance costs. The $800 million revolving facility was undrawn at year-end. The current ratio was 1.3, compared with 1.7 in fiscal 2018; fiscal 2019 balance-sheet comparisons are affected by adoption of the lease-accounting standard. At adoption, Ross recorded approximately $2.9 billion of lease liabilities and corresponding right-of-use assets; year-end operating lease liabilities totaled $3.175 billion.
Material changes, outlook, risks and unusual items
- Sales growth reflected 88 net new stores and 3% comparable-store growth. Store count rose 5%; sales per average square foot increased to $432 from $422.
- Diluted EPS growth exceeded net-earnings growth partly because share repurchases reduced weighted-average diluted shares by about 3%. Fiscal 2019 repurchases totaled $1.275 billion, or 12.3 million shares.
- Management expected a fiscal 2020 effective tax rate of approximately 24%. No specific fiscal 2020 sales or earnings guidance is provided.
- COVID-19 was a major subsequent event: after year-end, Ross temporarily closed all stores, buying and corporate offices, and distribution centers effective March 20, 2020 through April 3, subject to possible extensions. Management expected a material adverse effect on fiscal 2020 results, financial position, and cash flows, but could not forecast its full impact.
- In March 2020, Ross drew $800 million under its revolving credit facility, at LIBOR plus 0.75% (then stated as 1.61%), to increase liquidity. It suspended stock repurchases and reduced expenses, inventory receipts, and planned capital expenditures. Management said cash, operating cash flow, credit lines, and trade credit were adequate for near-term needs, while noting prolonged closures could require additional credit-market access and dividends could be discontinued if necessary.
- Principal risks include pandemic-related store and supply-chain disruption, consumer-spending declines, competition including online retail, merchandise availability and inventory markdowns, freight and distribution costs, labor costs, cybersecurity and systems disruption, foreign sourcing and tariffs, weather, and legal and regulatory matters. Packaway inventory was 46% of inventory at year-end, exposing results and cash flow to future demand and release timing.
- Pending wage-and-hour and consumer-protection class or representative actions, primarily in California, and other proceedings were described as not expected by management to materially adversely affect financial condition, results, or cash flows. Fiscal 2019 adoption of ASC 842 reduced beginning retained earnings by $19.6 million; reported prior-year balance sheets were not restated.
Most important facts for investors to verify
- Actual duration and financial effects of COVID-19 closures, demand weakness, supply constraints, and any subsequent changes to liquidity, borrowing, dividends, or repurchases.
- Whether comparable-store trends and merchandise margins can recover, given slower comparable growth and increased freight and distribution costs.
- Cash generation, inventory quality and packaway turnover, and funding needs for leases, capital projects, and purchase obligations.
- Lease-adjusted leverage and covenant headroom, distinguishing recorded debt from substantial operating-lease commitments.
- Fiscal 2020 tax rate and the recurrence of tax benefits; fiscal 2019 EPS included an approximately $0.02 per-share benefit from a tax matter.