Ross Stores, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended April 29, 2023, compared with the three months ended April 30, 2022. The request metadata says “2022 Q1,” but the filing covers fiscal 2023 Q1.
Business context
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS off-price retail chains. At quarter-end, it had 2,034 stores: 1,704 Ross and 330 dd’s DISCOUNTS. It opened 19 stores during the quarter.
Financial and operating performance
| Metric | Q1 FY2023 | Prior-year quarter | Change / context |
|---|---|---|---|
| Sales | $4.495 billion | $4.333 billion | Up 3.7%; comparable-store sales up 1%, versus a 7% decline |
| Gross margin | 26.7% | 26.2% | Cost of goods sold fell to 73.3% of sales from 73.8% |
| SG&A | 16.6% of sales | 15.4% | Higher incentive compensation and store wages |
| Operating income | Not separately presented | Not separately presented | Filing does not provide a clear value |
| Earnings before taxes | $487.3 million | $449.5 million | 10.8% and 10.4% of sales, respectively |
| Net earnings | $371.2 million | $338.4 million | Up about 9.7%; net margin 8.3%, versus 7.8% |
| Diluted EPS | $1.09 | $0.97 | Increase reflects higher earnings and fewer weighted-average shares |
| Operating cash flow | $413.2 million provided | $416.3 million used | Improvement attributed to earnings, lower incentive payments, and accounts-payable leverage |
| Capital expenditures | $167.3 million | $109.8 million | Higher spending, including distribution-center and store projects |
Net interest was income of $31.4 million, versus net expense of $17.7 million a year earlier, principally because interest income increased to $50.8 million from $1.2 million. Management said lower ocean freight costs supported merchandise margins; higher distribution expenses, buying costs, SG&A, and store wages partly offset the benefit.
Financial position and capital allocation
Cash and cash equivalents were $4.416 billion at April 29, 2023, down from $4.552 billion at fiscal year-end. Merchandise inventory was $2.242 billion, compared with $2.023 billion at fiscal year-end and $2.674 billion a year earlier; packaway inventory was 42% of total inventory. Current assets were $7.040 billion and current liabilities $3.781 billion.
Long-term debt was $2.458 billion, consisting of unsecured senior notes. The company had no borrowings or letters of credit outstanding under its $1.3 billion revolving facility, remained in covenant compliance, and said the facility was available. Operating lease liabilities were $3.274 billion in total. Management believes cash, operating cash flows, and available credit and trade credit can fund operations and planned needs for at least 12 months.
Financing cash outflows included $234.5 million of share repurchases under the $1.9 billion program and $114.8 million of dividends paid. The company declared a $0.335-per-share dividend payable June 30, 2023. Fiscal 2023 capital expenditures were projected at approximately $810 million.
Outlook, risks, and contingencies
Management expects approximately 100 new stores in fiscal 2023 and expects lower ocean freight costs and higher incentive compensation expense to continue. It also expects SG&A pressure from incentive compensation and store wages. No specific full-year sales or earnings guidance is provided in the filing.
Management cited ongoing uncertainty, inflation, and pressure on discretionary spending among low-to-moderate income customers. Risks include consumer demand and preferences, competition, inventory and markdown management, merchandise sourcing and supply-chain disruption, weather, labor availability, cybersecurity, and legal, regulatory, and tax matters. Pending wage-and-hour class or representative actions and other proceedings were described; management does not expect their resolution to have a material adverse effect. Unrecognized tax benefits were $59.9 million, with up to $11.3 million potentially decreasing over the next 12 months.
Other notable items: supplier-finance obligations included in accounts payable were $146.5 million. The interim financial statements were reviewed, not audited; the reviewer reported no material modifications needed for GAAP conformity.
Important facts for investors to verify
- Whether comparable-store sales and customer demand sustain improvement amid the inflationary and consumer-spending pressures described by management.
- How much earnings growth depends on unusually high interest income, and how it may change with interest rates and cash balances.
- Inventory levels, packaway mix, accounts-payable leverage, and whether operating cash flow remains positive as working-capital timing changes.
- Execution and funding of the approximately $810 million capital-spending plan and roughly 100 planned store openings.
- Ongoing SG&A and distribution-cost pressures, the remaining share-repurchase authorization, and legal and tax contingencies.