Business context and reporting period
Ross Stores operates Ross Dress for Less and dd’s DISCOUNTS, off-price apparel and home-fashion retailers. This 10-Q reports the quarter and six months ended August 1, 2015, compared with periods ended August 2, 2014. The request metadata says 2014 Q2, but the filing itself is for fiscal 2015 Q2.
At quarter-end, the company operated 1,424 stores, including 1,259 Ross and 165 dd’s DISCOUNTS locations, up 86 net stores year over year. Per-share and share figures reflect the June 2015 two-for-one stock split.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Sales | $2,968.3 million, up 8.7% | $5,906.4 million, up 9.2% |
| Comparable-store sales | Up 4% (prior year: 2%) | Up 5% (prior year: 2%) |
| Net earnings | $258.6 million, up 8.0% | $540.8 million, up 11.9% |
| Diluted EPS | $0.63 (prior year: $0.57) | $1.32 (prior year: $1.15) |
| Cost of goods sold / SG&A, as % of sales | 71.4% / 14.7% (prior year: 71.2% / 14.5%) | 70.9% / 14.3% (prior year: 71.2% / 14.3%) |
| Pre-tax / net margin | 13.9% / 8.7% (prior year: 14.3% / 8.8%) | 14.7% / 9.2% (prior year: 14.5% / 8.9%) |
| Operating cash flow | Not separately reported | $590.4 million (prior year: $741.8 million) |
Quarterly pre-tax margin fell mainly as cost of goods sold and SG&A rose as a share of sales. For the six months, lower cost of goods sold as a share of sales helped improve pre-tax and net margins. Quarter cost pressure included higher distribution, freight, and buying costs, partly offset by better merchandise margin and occupancy leverage. Six-month merchandise margin and occupancy leverage improved.
Six-month investing cash outflow was $193.3 million, including $193.1 million of capital expenditures; financing cash outflow was $463.4 million. Cash declined $66.3 million to $630.3 million. Operating cash flow was lower year over year, primarily reflecting earlier and higher packaway inventory receipts; inventory cash use was $137.1 million versus $1.7 million in the prior-year period. Free cash flow, calculated as operating cash flow less capital expenditures, was approximately $397.3 million, versus $488.4 million.
At August 1, 2015, current assets were $2,370.0 million and current liabilities $1,675.7 million. Long-term debt was $395.8 million, compared with $149.7 million a year earlier; cash exceeded reported long-term debt by approximately $234.5 million. The company had no borrowings or letters of credit under its $600 million revolving facility, which remained available through June 2017. Senior-note covenants were satisfied. Six-month cash dividends paid were $96.9 million; share repurchases were $351.5 million, in addition to $63.6 million of treasury shares acquired through employee plans.
Changes, outlook, risks, and unusual items
- Sales growth reflected 86 net new stores and comparable-store sales gains. Diluted EPS growth also benefited from a 3% reduction in weighted-average diluted shares, attributed to stock repurchases.
- Management forecast fiscal 2015 capital expenditures of approximately $400 million, reduced from $450 million, mainly due to lower distribution-center construction costs and deferred projects. The company expected to fund this primarily with cash and operating cash flow.
- Management expected a fiscal 2015 effective tax rate of 37%–38%. No earnings or sales guidance is stated in the provided filing text.
- Management said cash, operating cash flow, credit lines, and trade credit should meet operating needs and planned investments, repurchases, and dividends for at least 12 months. It cautioned that sales growth and margins may not continue and that forecasts are subject to changing conditions.
- Contractual obligations included $2,377.9 million of operating lease payments and $2,059.8 million of purchase obligations. The company also had $400 million aggregate principal of senior notes. These obligations should be considered alongside cash and liquidity.
- Risks include intense retail competition, consumer spending and preference changes, merchandise availability, inventory and markdown execution, supply-chain or systems disruptions, cybersecurity, labor costs, store and distribution expansion, and legal, regulatory, and tax matters. Pending wage-and-hour and consumer-protection class actions remained; management did not expect pending litigation to materially affect financial condition, results, or cash flows.
- Unrecognized tax-benefit reserves were $105.2 million; management said up to $3.6 million could reduce tax expense within 12 months if tax positions resolve favorably. The filing also notes the stock split and retrospective adoption of debt-issuance-cost presentation guidance; adoption did not affect earnings or cash flows. The interim financial statements were reviewed, not audited.
Important facts for investors to verify
- Confirm the reporting period: the filing covers fiscal 2015 Q2, not 2014 Q2.
- Track whether comparable-store sales and margins hold up, particularly against quarter-level distribution, freight, and SG&A pressures.
- Monitor inventory and packaway levels and their effect on operating cash flow and accounts-payable leverage.
- Assess planned capital expenditures, store expansion, buybacks, and dividends against cash generation and the substantial lease and purchase obligations.
- Review developments in pending litigation, tax audits and reserves, and the company’s ability to maintain covenant compliance and liquidity.