Ross Stores, Inc. — Form 10-K Summary
Reporting period: Fiscal 2014, the 52 weeks ended January 31, 2015. The request metadata says “2013 Q4,” but this filing covers fiscal 2014; it also presents fourth-quarter results for the quarter ended January 31, 2015. Fiscal 2013 was also 52 weeks; fiscal 2012 was 53 weeks.
Business context
Ross operates off-price apparel and home-fashion retailers Ross Dress for Less and dd’s DISCOUNTS. At year-end, the company operated 1,210 Ross stores and 152 dd’s DISCOUNTS stores, for 1,362 total locations. It emphasizes name-brand merchandise at substantial discounts and expanded by 86 net stores during fiscal 2014.
Financial performance
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Sales | $11.042 billion | $10.230 billion |
| Sales growth | 7.9% | 5.2% |
| Comparable-store sales growth | 3% | 3% |
| Cost of goods sold | $7.938 billion; 71.9% of sales | $7.361 billion; 72.0% of sales |
| SG&A | $1.615 billion; 14.6% of sales | $1.526 billion; 14.9% of sales |
| Earnings before taxes | $1.485 billion; 13.5% of sales | $1.343 billion; 13.1% of sales |
| Net earnings | $924.7 million; 8.4% of sales | $837.3 million; 8.2% of sales |
| Diluted EPS | $4.42 | $3.88 |
| Operating cash flow | $1.373 billion | $1.022 billion |
| Capital expenditures | $646.7 million | $550.5 million |
Gross margin was approximately 28.1%, up from 28.0%. Management attributed the improvement to a 20-basis-point increase in merchandise gross margin, partly offset by higher buying costs. SG&A as a share of sales fell about 30 basis points, primarily due to expense control. Diluted EPS rose 14%, reflecting higher earnings and a 4% reduction in weighted-average diluted shares, largely from repurchases.
Fourth-quarter sales were $3.033 billion versus $2.741 billion in the comparable quarter, and net earnings were $248.5 million versus $218.0 million. Quarterly diluted EPS was $1.20 versus $1.02.
Financial position, liquidity and capital allocation
- Cash and cash equivalents were $696.6 million at year-end, up from $423.2 million; working capital was $603.4 million and the current ratio was 1.4:1.
- Merchandise inventory was $1.373 billion, up from $1.257 billion. Packaway inventory declined to 45% of total inventory from 49%.
- Long-term debt was $398.4 million, compared with $150.0 million. The increase reflects issuance of $250 million of 3.375% senior notes due 2024; net proceeds were used mainly to purchase the New York buying-office building. The company reported no borrowings under its $600 million revolver, which expires in June 2017, and compliance with debt covenants.
- Cash used in financing was $460.4 million, including $550 million of share repurchases and $168.5 million of dividends paid. In February 2015, the board authorized a new $1.4 billion repurchase program for fiscal 2015–2016 and declared a quarterly dividend of $0.235 per share.
- Management estimated fiscal 2015 capital expenditures of approximately $450 million and said cash, operating cash flow, trade credit and available credit were adequate for operating needs, planned investment, repurchases and dividends for at least the next 12 months.
Changes, outlook and risks
- Sales growth accelerated to 7.9% from 5.2%, while comparable-store growth remained 3%. Store count increased 7% to 1,362.
- Operating cash flow improved by $350.9 million, primarily due to higher earnings and increased accounts-payable leverage. Capital spending continued to rise, including the New York office purchase and distribution-center investment.
- Management forecast a 37%–38% effective tax rate for fiscal 2015. The filing gives no specific fiscal 2015 sales or earnings guidance; store expansion is expected to continue in existing and newer markets.
- A new distribution center in Shafter, California was under construction and expected to open in 2015. Management said current distribution capacity and planned expansion should support store growth.
- Key risks include intense retail competition; changes in consumer spending, preferences and weather; availability of discounted branded inventory; supply-chain or information-system disruption, including cybersecurity; execution of store and distribution expansion; and inventory markdowns or shortage. California concentration is notable: headquarters, buying and distribution operations and 25% of stores are located there.
- Pending wage-and-hour class actions and other ordinary-course legal matters remain unresolved. Management believes their resolution will not materially adversely affect financial condition, results or cash flows. The company also disclosed $101.7 million of unrecognized tax-benefit liabilities; up to $6.3 million could reduce tax expense if certain tax positions resolve favorably within 12 months.
- CEO Barbara Rentler and Executive Chairman Michael Balmuth assumed their roles in June 2014. A two-for-one stock split was approved in March 2015, payable June 11, 2015; per-share amounts in the filing were not adjusted for the pending split.
Important facts for investors to verify
- Whether comparable-store sales and merchandise margins remain resilient as store growth contributes more to total sales.
- Whether inventory growth, packaway levels and accounts-payable leverage remain consistent with healthy turnover and operating cash generation.
- Execution, cost and timing of the Shafter distribution center and other planned capital projects, against the approximately $450 million fiscal 2015 capital-spending estimate.
- Debt maturities, fixed interest obligations, lease commitments and the company’s capacity to sustain planned repurchases and dividends.
- Developments in employment litigation, tax audits and cybersecurity or supply-chain risks.