Ross Stores, Inc. — Form 10-K Summary
Reporting period: The filing covers fiscal 2010, the 52 weeks ended January 29, 2011, with comparisons to fiscal 2009 ended January 30, 2010. Although the request metadata says “2009 Q4,” this filing is the fiscal 2010 annual report; fourth-quarter figures are included below for context.
Business context
Ross operated 1,055 off-price stores at year-end: 988 Ross Dress for Less locations and 67 dd’s DISCOUNTS stores. Fiscal 2010 growth came from comparable-store sales and 50 net store additions. The company emphasized discounted, in-season branded merchandise, opportunistic buying, and expansion of its younger dd’s DISCOUNTS chain.
Financial performance
| Metric | Fiscal 2010 | Fiscal 2009 | Change |
|---|---|---|---|
| Sales | $7,866.1 million | $7,184.2 million | Up 9.5% |
| Comparable-store sales | Up 5% | Up 6% | Growth moderated |
| Gross margin | 27.2% | 25.8% | Up about 130 bps |
| SG&A as % of sales | 15.6% | 15.7% | Down about 10 bps |
| Earnings before taxes | $897.0 million | $718.5 million | Up 24.8% |
| Net earnings | $554.8 million | $442.8 million | Up 25.3% |
| Diluted EPS | $4.63 | $3.54 | Up 31% |
| Operating cash flow | $673.1 million | $888.4 million | Down $215.3 million |
The gross-margin improvement reflected stronger merchandise margin, lower shortage, occupancy leverage, and lower distribution costs, partly offset by higher freight. Net earnings were 7.1% of sales, versus 6.2% in fiscal 2009. EPS growth also benefited from a 4% reduction in weighted-average diluted shares, principally from repurchases.
Fiscal fourth quarter: Sales were $2,145.2 million versus $1,979.8 million in the prior-year quarter; net earnings were $161.8 million versus $142.9 million; diluted EPS was $1.37 versus $1.16.
Financial position, liquidity, and capital allocation
- Cash and cash equivalents were $833.9 million at January 29, 2011, up from $768.3 million. Working capital was $690.9 million and the current ratio was 1.5:1.
- Merchandise inventory rose to $1,086.9 million from $872.5 million. Packaway inventory increased to approximately 47% of total inventory from 38%; management attributed lower operating cash flow partly to cash used for additional packaway purchases.
- Long-term debt remained $150 million, consisting of senior notes due 2018 and 2021. There were no borrowings under the $600 million revolving facility at year-end; the company reported covenant compliance.
- Cash flow from operations of $673.1 million less capital expenditures of $198.7 million implies approximately $474 million of cash flow after capital spending. Investing activities used $196.8 million; financing activities used $410.6 million.
- The company repurchased 6.7 million shares for approximately $375 million and declared $0.70 per share in fiscal 2010 dividends. A new two-year, $900 million repurchase authorization was approved in January 2011.
- Operating lease rent obligations totaled $1,972.7 million, and total contractual obligations were $3,613.3 million. These commitments are important alongside reported debt.
Outlook, risks, and notable items
- For 2011, management planned to reduce average store inventory while maintaining strict expense controls, continue store growth in existing markets, and enter new states for both chains. No full-year sales or earnings forecast is provided in the filing.
- Planned fiscal 2011 capital expenditures were approximately $380–$390 million, expected to be funded from cash and operating cash flows. Management expected a tax rate of about 38% and stated that available cash, operating cash flow, credit lines, and trade credit should cover needs for at least 12 months.
- In March 2011, after year-end, Ross replaced its revolving facility with a new $600 million unsecured facility expiring March 2016. The stated current margin was LIBOR plus 150 basis points, compared with 45 basis points on the facility at year-end.
- Risks include retail competition and changes in consumer spending, access to attractive discounted merchandise, supply-chain disruption, weather, store-site availability, execution of merchandising systems and expansion, and inventory markdowns or shortage. The company also noted geographic concentration: 26% of stores, headquarters, its Los Angeles buying office, and two distribution centers were in California.
- Pending California wage-and-hour class actions and other ordinary-course litigation were not expected by management to have a material adverse effect. A $70 million synthetic lease for a California distribution center includes a residual-value guarantee of up to $56 million; $3.5 million was accrued for an estimated shortfall.
- Unrecognized tax benefits were $41.8 million net of federal tax benefits, including interest; management said up to $1.1 million could reduce the tax provision if statutes of limitation lapse within 12 months. Packaway inventory valuation, shortage reserves, self-insurance estimates, and tax positions involve significant judgments.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal financial controls were effective at year-end.
Important facts for investors to verify
- Whether inventory growth and the higher packaway mix convert into sales at planned margins without elevated markdowns or write-downs.
- Whether operating cash flow recovers after the year-end inventory build, and whether planned capital spending and the $900 million repurchase authorization remain supported by cash generation.
- Comparable-store sales, gross-margin trends, and new-store profitability, particularly as management expands into new states and grows dd’s DISCOUNTS.
- The full economic burden of leases and synthetic-lease guarantees, as well as covenant terms and pricing under the replacement credit facility.
- Developments in wage-and-hour litigation, tax audits and unrecognized tax benefits, and the estimated residual-value shortfall for the Perris distribution center.