Ross Stores, Inc. — Form 10-K Summary
Period clarification: The supplied filing is the fiscal 2020 Form 10-K for the 52 weeks ended January 30, 2021, not a 2019 Q4 filing. Figures below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Business context and reporting period
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. At year-end, it had 1,585 Ross stores and 274 dd’s DISCOUNTS stores, or 1,859 total. The company reports one operating segment.
Financial performance and position
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Sales | $12,531.6 | $16,039.1 |
| Sales change | (21.9%) | +7.0% |
| Cost of goods sold / sales | 78.5% | 71.9% |
| SG&A / sales | 20.0% | 14.7% |
| Earnings before taxes | $106.3 | $2,164.3 |
| Net earnings | $85.4 | $1,660.9 |
| Diluted EPS | $0.24 | $4.60 |
| Cash from operations | $2,245.9 | $2,171.5 |
| Capital expenditures | $405.4 | $555.5 |
- Net margin was 0.7%, versus 10.4% in fiscal 2019. Comparable-store sales for fiscal 2020 were not considered meaningful because of pandemic-related closures.
- Fourth-quarter sales were $4,249.7 million and net earnings were $238.0 million; diluted EPS was $0.67. The quarter included an approximately $0.65-per-share debt-refinancing charge.
- Year-end cash and cash equivalents were $4,819.3 million; inventory was $1,509.0 million. Working capital was $2,725.5 million and the current ratio was 1.7.
- Reported long-term debt was $2,513.1 million, including $64.9 million current and $2,448.2 million non-current. The $800 million revolving facility was undrawn at year-end, giving reported liquidity of more than $5.6 billion including cash and facility availability.
- Operating cash flow remained strong, supported in part by lower inventory and higher accounts payable. Accounts payable was $2,256.9 million, up from $1,296.5 million; management attributed the increase partly to extended payment terms.
Material changes versus the prior period
- COVID-19 closures beginning March 20, 2020, reduced hours, occupancy limits, and weaker customer demand drove a 21.9% annual sales decline. Stores reopened in phases; all distribution centers were open by late May and most stores by late June.
- Gross margin, inferred as sales less cost of goods sold, fell to 21.5% from 28.1%. Aged and seasonal inventory required deep markdowns; COVID-related costs and higher distribution and freight costs also pressured results.
- Fiscal 2020 included approximately $240 million of debt-extinguishment costs. Net interest expense was $83.4 million, compared with net interest income of $18.1 million in fiscal 2019.
- Cash increased substantially following debt issuance and liquidity-preservation measures. The company issued $2.0 billion of senior notes in April and $1.0 billion in lower-rate notes in October, using the latter proceeds to fund tender offers for approximately $775 million principal amount of earlier notes.
- Capital spending and store openings were reduced: 66 stores opened and 12 closed in fiscal 2020, compared with 98 opened and 10 closed in fiscal 2019.
Outlook, commentary, risks, and unusual items
- Management expected material pandemic-related effects, higher operating costs, and uncertainty in consumer demand to continue through fiscal 2021 and potentially beyond. It cautioned that future sales, earnings recovery, and growth could not be reliably predicted.
- Fiscal 2021 capital expenditures were projected at approximately $700 million, primarily for the Brookshire, Texas distribution center, store projects, and technology. The Brookshire facility was expected to open in 2022.
- The company said cash, its bank facility, and trade credit were adequate for at least the next 12 months, while warning that renewed closures or restrictions could interrupt operating cash flows. Its $800 million revolving credit facility remained available and covenant compliance was reported at year-end.
- Quarterly dividends and the stock-repurchase program were suspended in 2020 to preserve liquidity. The board declared a $0.285-per-share dividend in March 2021, resuming dividends; no shares were repurchased under the public program after its March 2020 suspension.
- Major risks include renewed pandemic disruption, consumer and employment weakness, inventory markdowns and shortage, availability of attractive branded merchandise, supply-chain and freight disruption, competition including e-commerce, cybersecurity, labor costs, and concentration of stores and distribution facilities in California, Texas, and Florida.
- Pending matters include California-focused wage-and-hour and consumer-protection class/representative actions. The company also sued insurers in December 2020 over pandemic-related business-interruption and other coverage. Management did not expect pending proceedings to materially affect results, but outcomes remain uncertain.
- Auditors issued unqualified opinions on the financial statements and internal controls; they reported no critical audit matters.
Important facts for investors to verify
- Confirm the intended period: this filing covers fiscal 2020 ended January 30, 2021, rather than 2019 Q4.
- Track sales, comparable-store trends, traffic, operating hours, and margins as pandemic restrictions and customer behavior change.
- Assess whether operating cash flow remains sustainable: fiscal 2020 benefited from lower inventory and unusually high accounts-payable leverage.
- Review debt maturities, interest expense, lease commitments, and the effect of refinancing; operating lease liabilities were $3,219.7 million on the balance sheet.
- Monitor execution of the approximately $700 million fiscal 2021 capital plan and the timing and cost of the Brookshire distribution center.
- Follow the insurance-coverage litigation, employment claims, and any changes to dividends or the suspended repurchase program.