Ross Stores, Inc. — Form 10-Q Summary
Business context and period. Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS off-price retail chains. This filing covers the quarter ended July 29, 2023 (fiscal 2023 Q2) and the six months then ended; this differs from the “2022 Q2” period in the request metadata. Results are unaudited. The auditor’s interim review found no material modifications needed for GAAP conformity.
Key financial results
| Metric | Three months ended July 29, 2023 | Prior-year quarter | Six months ended July 29, 2023 | Prior-year six months |
|---|---|---|---|---|
| Sales | $4.935 billion | $4.583 billion | $9.430 billion | $8.916 billion |
| Comparable-store sales growth | 5% | (7%) | 3% | (7%) |
| Net earnings | $446.3 million | $384.5 million | $817.5 million | $723.0 million |
| Diluted EPS | $1.32 | $1.11 | $2.41 | $2.08 |
| Net earnings as % of sales | 9.0% | 8.4% | 8.7% | 8.1% |
Margins and drivers. Cost of goods sold was 72.3% of sales in Q2, down from 74.2%; for the six-month period it was 72.8%, down from 74.0%. Management attributed the improvement mainly to lower freight costs and better merchandise margin. SG&A rose to 16.4% of sales in Q2 from 14.5%, and to 16.5% for six months from 15.0%, primarily on higher incentive compensation, store wages, and new stores. Net interest income was $37.2 million in Q2 and $68.6 million for six months, versus net interest expense in the comparable prior-year periods, largely reflecting higher interest income.
Cash flow, balance sheet, and capital allocation. Six-month operating cash flow was $1.116 billion, compared with $56.3 million used in the prior-year period. Management cited higher earnings, lower incentive-compensation payments, and greater accounts-payable leverage; inventory timing also affects operating cash flow. Investing cash outflow was $363.5 million, primarily capital spending, versus $243.3 million. Financing cash outflow was $719.8 million, largely share repurchases and dividends. Cash, cash equivalents, and restricted cash totaled $4.645 billion at quarter-end, including $4.584 billion unrestricted cash. Long-term debt was $2.459 billion; the $1.3 billion revolving facility was undrawn and available, and the company was covenant-compliant. The company repurchased 4.3 million shares for $464.9 million and paid $228.8 million in dividends during the first half.
Inventory was $2.300 billion, down from $2.717 billion a year earlier but up from $2.023 billion at fiscal year-end. Packaway inventory was 38% of total inventory at quarter-end. Total stores were 2,061, up from 1,980 a year earlier.
Outlook, commentary, and risks
- Management expected to open approximately 100 stores in fiscal 2023; 27 opened in Q2. Fiscal 2023 capital expenditures were projected at approximately $800 million, funded with available cash.
- Management expected lower ocean and domestic freight costs, as well as higher incentive compensation and SG&A from incentive compensation and store wages, to continue through fiscal 2023. No specific full-year sales or EPS guidance is provided in the filing text.
- Management said inflationary pressures continued to weigh on discretionary spending by low-to-moderate-income customers. The company planned to manage expenses and inventory carefully while monitoring off-price market share.
- Key risks include macroeconomic and consumer-spending uncertainty, merchandise availability and inventory/markdown management, supply-chain and freight disruption, competition, weather, cybersecurity and systems disruptions, and store-site availability.
- Pending wage-and-hour class/representative actions and other legal proceedings remain outstanding; management did not expect their resolution to materially adversely affect financial condition, results, or cash flows. Unrecognized tax benefits were $63.3 million; up to $13.1 million could decrease in the next 12 months as matters conclude or limitations expire.
- The filing lists contractual obligations of $11.869 billion, including $4.214 billion of purchase obligations, $3.400 billion of operating leases, and $2.475 billion of senior notes. Management estimated liquidity was adequate for operating needs and planned investments, buybacks, dividends, and interest for at least 12 months.
Most important facts for investors to verify
- Confirm the intended period: the filing is for fiscal 2023 Q2, not 2022 Q2.
- Track whether comparable-store sales gains persist and whether inflation continues to pressure Ross’s target customers.
- Assess sustainability of margin improvement from lower freight against higher wages, incentive compensation, and other SG&A.
- Monitor inventory levels, packaway mix, payable timing, and the resulting volatility in operating cash flow.
- Review progress and funding needs for the planned store openings, distribution-center projects, and approximately $800 million fiscal-year capital program.
- Monitor buybacks, dividends, debt maturities, and the resolution of legal and tax matters.