ROST

Ross Stores, Inc. - 10-Q Filing Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Ross Stores, Inc., an off-price retailer, for the quarterly period ended November 1, 2003. The report covers the three and nine months ended on this date. As of November 28, 2003, there were 75,607,680 shares of Common Stock outstanding. The company operates 573 stores as of the period end.

Key Financial Metrics

Material Changes vs. Prior Period

• Sales Growth: Sales increased 12.3% for the quarter and 9.9% for the nine-month period compared to the prior year. This growth was driven by the opening of 20 new stores in the quarter (66 in the nine months) and a 2% increase in comparable store sales for the quarter (flat for the nine months).
• Profitability: Net earnings increased 12% for the quarter and 8% for the nine-month period. Diluted EPS increased 14% for the quarter and 12% for the nine months, aided by a reduction in weighted average shares due to stock repurchases.
• Cost Structure: Cost of goods sold as a percentage of sales remained flat at 74.7% for the quarter but increased slightly from 74.4% to 74.7% for the nine-month period, largely due to increased store occupancy costs offsetting improved merchandise margins and lower distribution costs.
• SG&A Expenses: Selling, general, and administrative expenses as a percentage of sales decreased slightly for both periods, primarily due to lower benefit and incentive plan costs.
• Capital Allocation: The company repurchased approximately $125.2 million of common stock during the nine-month period and paid $13.2 million in dividends.

Guidance, Outlook, and Risks

• Outlook: Management expects to address competitive pressures by refining strategies, strengthening the merchandise organization, and diversifying the merchandise mix. However, the company states there can be no assurance that existing strategies will result in continued revenue and profit growth.
• Stock Split: Subsequent to the period end, the company announced a two-for-one stock split to be effected as a 100% stock dividend in December 2003. All share data in this filing is pre-split.
• Expansion: The company is transitioning operations from its Newark, California distribution center to a new Southern California center in Perris, expecting completion in the fourth quarter of fiscal 2003.
• Risks: Key risks include general economic deterioration, competitive pressures, the ability to obtain store locations, and the ability to purchase attractive merchandise at desirable discounts. A significant portion of the company's operations (32% of stores and corporate headquarters) are located in California, exposing it to regional economic downturns or natural disasters.
• Contingencies: The company has significant residual value guarantees associated with synthetic leases for its distribution centers and point-of-sale equipment, totaling potential obligations of up to $112 million if assets are sold for less than guaranteed amounts.

Investor Verification Checklist

• Verify the impact of the upcoming two-for-one stock split on share count and per-share metrics in future filings.
• Monitor the transition of the Southern California distribution center and its effect on logistics costs and occupancy expenses.
• Review the status of the $300 million stock repurchase program, noting $125.2 million has been utilized in the current fiscal year.
• Assess the sustainability of comparable store sales growth, which was flat for the nine-month period despite a 2% increase in the quarter.
• Confirm compliance with debt covenants related to interest coverage and leverage ratios, particularly given the variable interest rates on the $50 million term loan and synthetic leases.