Ross Stores, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2016, ended October 29, 2016; comparative periods ended October 31, 2015. The request metadata says “2015 Q3,” but the filing itself reports fiscal 2016.
Business context and performance
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS. At quarter-end it had 1,535 stores, including 1,342 Ross and 193 dd’s DISCOUNTS locations, versus 1,448 a year earlier. The company opened 87 net stores over the year.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Sales | $3.087 billion | $2.783 billion | $9.357 billion | $8.689 billion |
| Sales growth | 10.9% | 7.1% | 7.7% | 8.5% |
| Comparable-store sales growth | 7% | 3% | 4% | 4% |
| Net earnings | $244.5 million | $215.7 million | $817.1 million | $756.5 million |
| Diluted EPS | $0.62 | $0.53 | $2.06 | $1.85 |
Margins, cash flow, debt and liquidity
- Q3 cost of goods sold was 71.5% of sales, down from 72.0%; SG&A was 15.9% in both periods. Pretax margin improved to 12.5% from 11.9%, and net margin to 7.9% from 7.7%.
- For the nine months, cost of goods sold was 70.9% of sales versus 71.2%; SG&A rose to 14.9% from 14.8%. Pretax margin was 14.0% versus 13.9%; net margin was 8.7% in both periods.
- Nine-month operating cash flow was $1.029 billion, versus $762.0 million; investing cash outflow was $216.0 million and financing cash outflow was $696.0 million. Cash increased $117.2 million to $878.8 million.
- Merchandise inventory was $1.764 billion, up from $1.701 billion at October 31, 2015. The company attributed higher operating cash flow partly to timing of receipts and payments and higher earnings; inventory growth was a significant cash use.
- Capital expenditures were $220.4 million for the nine months. Long-term debt was $396.4 million, consisting of fixed-rate senior notes. The company had no borrowings or letters of credit under its $600 million revolving facility and reported compliance with debt covenants. Cash exceeded reported long-term debt by approximately $482 million.
- Cash dividends declared were $0.135 per share in each of the first three quarters, compared with $0.1175 per share in the comparable 2015 quarters. The company repurchased $530.3 million of shares during each nine-month period; 9.1 million shares were repurchased in 2016.
Changes, outlook and risks
- Q3 sales growth accelerated, supported by 7% comparable-store growth and 87 net new stores. Management cited improved merchandise margin and lower occupancy costs as contributors to lower Q3 cost of goods sold as a percentage of sales. Nine-month SG&A as a percentage of sales increased, mainly due to higher wages.
- Management forecast fiscal 2016 capital expenditures of approximately $315 million, reduced from its prior $325 million forecast, mainly due to deferred distribution-center and buying-office projects. It expected to fund investment primarily from cash and operating cash flow.
- Management anticipated a fiscal 2016 effective tax rate of 37%–38%. The filing provides no specific sales or earnings guidance.
- Management said cash, operating cash flow, credit lines and trade credit should cover operating needs, planned investments, repurchases and dividends for at least the next 12 months. This outlook is subject to risks including competition, consumer demand, weather, merchandise availability, inventory and markdown management, supply-chain or systems disruptions, cybersecurity, store expansion and legal or tax matters.
- Contractual obligations totaled $6.337 billion, including $2.523 billion of operating-lease rent obligations, $2.330 billion of purchase obligations and $400 million of senior-note principal. The filing notes a 99-year ground lease for its New York buying office.
- Pending class actions, primarily concerning wage-and-hour and consumer-protection claims, and other legal proceedings were disclosed; management did not expect their resolution to materially adversely affect financial condition, results or cash flows. Unrecognized tax benefits were $105.5 million; up to $8.2 million could reduce tax expense within 12 months if matters are resolved or statutes lapse.
- New lease-accounting guidance was expected to require balance-sheet recognition of most leases; the company was evaluating its impact. Interim financial statements were unaudited and reviewed by Deloitte & Touche, which reported no material modifications needed.
Important facts for investors to verify
- Confirm the period: the filing is for Q3 fiscal 2016, notwithstanding the “2015 Q3” request metadata.
- Assess whether the strong Q3 comparable-sales growth persists and how much growth depends on new-store openings.
- Monitor inventory levels, packaway inventory (45% of total inventory at quarter-end) and the effects on working capital and cash flow.
- Review the scale of lease and purchase commitments alongside cash, planned capital spending, dividends and remaining repurchase authorization; approximately $169.7 million remained under the fiscal 2015–2016 repurchase program at quarter-end.
- Track wage pressures, tax examinations and unrecognized tax benefits, and the outcomes of pending litigation.