Ross Stores, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, three months ended April 30, 2016, compared with the three months ended May 2, 2015. The request metadata says “2015 Q1,” but the filing itself reports 2016 Q1.
Ross operates Ross Dress for Less and dd’s DISCOUNTS. At quarter-end, it had 1,473 stores: 1,295 Ross and 178 dd’s DISCOUNTS. The interim financial statements are unaudited; Deloitte & Touche performed a review, not an audit.
Financial performance and condition
| Metric | Q1 2016 | Prior-year quarter | Change / context |
|---|---|---|---|
| Sales | $3.089 billion | $2.938 billion | Up 5.1%; comparable-store sales up 2%, versus 5% previously |
| Cost of goods sold | $2.176 billion; 70.5% of sales | $2.067 billion; 70.4% | Cost ratio increased about 10 basis points |
| SG&A | $436.9 million; 14.1% of sales | $409.3 million; 13.9% | Expense ratio increased 20 basis points |
| Earnings before taxes | $471.5 million; 15.3% of sales | $459.4 million; 15.6% | Higher earnings, lower pretax margin |
| Net earnings | $290.6 million; 9.4% of sales | $282.2 million; 9.6% | Up about 3%; net margin declined |
| Diluted EPS | $0.73 | $0.69 | Up 5.8%; aided by higher earnings and fewer weighted-average shares |
| Operating cash flow | $469.1 million | $414.0 million | Increase attributed mainly to higher earnings and packaway inventory timing |
| Capital expenditures | $79.7 million | $106.9 million | Lower year over year |
Liquidity and debt: Cash and cash equivalents were $910.0 million at April 30, 2016, versus $761.6 million at January 30, 2016. Long-term debt was $396.1 million. The company had no borrowings or standby letters of credit under its new $600 million revolving credit facility and reported compliance with debt covenants. Current assets were $2.629 billion and current liabilities were $1.751 billion.
Cash uses and capital returns: Investing activities used $79.8 million; financing activities used $240.9 million. The company repurchased about $175.8 million of stock under its program, acquired $36.9 million of treasury shares for employee tax withholding, and paid $54.2 million in dividends. The declared quarterly dividend was $0.135 per share, up from $0.1175 in the prior-year quarter.
Material changes and management commentary
- Sales growth slowed to 5.1% from 9.6%, and comparable-store sales growth eased to 2% from 5%. The filing attributes sales growth to 74 net new stores since the prior-year comparison and higher comparable sales.
- Cost of goods sold as a share of sales rose mainly due to higher distribution expenses, including the impact of a distribution center opened in the prior-year second quarter, and packaway-cost timing. Higher merchandise margins and lower buying costs partly offset this pressure.
- SG&A as a share of sales increased, reflecting limited leverage from comparable-store growth and higher hourly wages, as well as costs from new stores.
- Net interest expense rose to $4.4 million from $2.0 million, primarily because substantially less interest was capitalized. The company entered a replacement $600 million revolving credit facility in April 2016, expiring in April 2021.
- Store count increased by 74 year over year; 28 stores opened and one closed during the quarter.
Outlook, risks, and contingencies
- Management anticipated a fiscal 2016 effective tax rate of 37%–38% and forecast approximately $425 million of capital expenditures for the year. It expected cash, operating cash flow, credit lines, and trade credit to cover operating needs, planned investment, repurchases, and dividends for at least the next 12 months.
- Management cautioned that the quarter’s sales and margin results may not continue. Risks identified include intense competition, shifts in consumer spending and preferences, weather, inventory and markdown execution, merchandise availability, supply-chain or systems disruptions, cybersecurity, store-site availability, legal and tax matters, and maintaining liquidity.
- Class-action lawsuits, primarily involving wage-and-hour and consumer-protection allegations, and other proceedings were pending. Management did not expect their resolution to have a material adverse effect on financial condition, results, or cash flows.
- Unrecognized tax-benefit reserves were $100.1 million. The company said certain tax matters or expiring statutes could reduce the reserve and tax provision by up to $5.1 million; it did not expect current audits to materially affect the statements.
- The company adopted deferred-tax balance-sheet classification guidance retrospectively, with no impact on earnings, retained earnings, or cash flows. It was evaluating new stock-compensation and lease accounting standards; the lease standard could require recognition of lease liabilities and right-of-use assets.
Important facts for investors to verify
- Confirm the intended reporting period: the filing covers fiscal Q1 2016, not Q1 2015 as stated in the request metadata.
- Track comparable-store sales and margins: comparable sales slowed, while cost and SG&A ratios rose and net margin declined.
- Assess how packaway inventory timing, distribution expenses, and wage increases affect future cash flow and profitability.
- Review the pace and funding of the $425 million capital plan, stock repurchases, and dividends alongside the company’s lease and purchase commitments.
- Monitor pending litigation and tax matters, and the eventual financial-statement effects of the new lease and stock-compensation standards.