Ross Stores, Inc. — Form 10-Q Summary
Period: The filing covers the quarter and six months ended August 3, 2013 (fiscal 2013 Q2), compared with periods ended July 28, 2012. The request metadata says “2012 Q2,” but the filing itself is for 2013 Q2. Amounts below are in U.S. dollars; financial statements are unaudited interim statements.
Business context and results
Ross operates Ross Dress for Less and dd’s DISCOUNTS. At quarter-end, it had 1,253 stores: 1,131 Ross and 122 dd’s DISCOUNTS. It opened 27 stores and closed one during the quarter.
| Metric | Three months ended Aug. 3, 2013 | Three months ended July 28, 2012 | Six months ended Aug. 3, 2013 | Six months ended July 28, 2012 |
|---|---|---|---|---|
| Sales | $2,551.3 million | $2,340.9 million | $5,091.2 million | $4,697.7 million |
| Sales growth | 9.0% | 12.0% | 8.4% | 12.8% |
| Comparable-store sales growth | 4% | 7% | 3% | 8% |
| Net earnings | $213.1 million | $182.0 million | $447.7 million | $390.6 million |
| Diluted EPS | $0.98 | $0.81 | $2.06 | $1.74 |
| Net margin | 8.3% | 7.8% | 8.8% | 8.3% |
Financial position, cash flow, and capital allocation
- Gross margin improved: cost of goods sold declined to 71.5% of sales for the quarter (from 72.2%) and 71.2% for six months (from 71.7%). Management cited higher merchandise margin, partly offset by distribution costs in the quarter and higher buying and incentive costs for the half.
- SG&A declined as a share of sales by about 10 basis points in both periods, to 14.9% for the quarter and 14.6% for six months. Pretax margin was 13.6% for the quarter and 14.2% for six months.
- Six-month operating cash flow was $532.3 million, versus $504.2 million. Investing cash use was $282.9 million, including $271.7 million of capital expenditures; financing cash use was $345.6 million. Cash declined $96.2 million to $550.6 million.
- Inventory was $1,330.5 million at August 3, 2013, compared with $1,219.1 million a year earlier. Packaway inventory was 46% of total inventory, versus 48% at the prior-year second-quarter end.
- Current assets were $2,098.5 million and current liabilities $1,471.8 million. Long-term debt was $150 million, consisting of senior notes due in 2018 and 2021; the $600 million revolving facility was undrawn and available. The company reported compliance with debt covenants.
- Six-month share repurchases were $276.6 million; dividends paid were $74.6 million. The board’s two-year repurchase authorization was $1.1 billion, with $823.4 million remaining at quarter-end. The quarterly dividend declared was $0.17 per share.
Changes, outlook, and risks
- Sales and earnings increased year over year, but comparable-store sales growth slowed from 7% to 4% in the quarter and from 8% to 3% for the first six months. Diluted EPS increased 21% for the quarter and 18% for six months, aided by higher earnings and approximately 3% fewer diluted shares from repurchases.
- Capital expenditures were $271.7 million for the first six months, versus $152.1 million a year earlier. Fiscal 2013 capital expenditures were forecast at approximately $670 million, including investment in two distribution centers, a data center, headquarters relocation, stores, and systems. The company expected to fund spending from cash and operating cash flow.
- Management anticipated an approximately 38% effective tax rate for fiscal 2013. The filing provides no specific sales or EPS guidance and cautions that current sales and margin trends may not continue.
- Key operating risks include retail competition and consumer demand, access to attractive branded merchandise, weather, supply-chain or systems disruption, inventory and markdown management, store and distribution-center expansion, and execution of headquarters and data-center moves. About 25% of stores and several facilities are in California, creating geographic concentration exposure.
- Employment-related class-action litigation and other legal proceedings remained pending; management did not expect their resolution to materially adversely affect results or cash flows. Unrecognized tax benefits totaled $93.9 million, including interest and penalties; up to $2.1 million could reduce tax expense if limitations periods lapse, while certain state returns were under audit.
- The company purchased its previously leased 1.3 million-square-foot Perris, California distribution center for $70 million in July 2013. This contributed to elevated capital spending.
Investor verification priorities
- Confirm the reporting-period discrepancy: the filing is for the quarter ended August 3, 2013, not 2012 Q2.
- Track comparable-store sales, margin sustainability, inventory growth and packaway levels, and whether operating cash flow continues to cover capital spending and shareholder returns.
- Monitor delivery and cost of the approximately $670 million fiscal 2013 capital plan, distribution-center projects, and headquarters/data-center moves.
- Review the remaining repurchase authorization, cash balance, debt covenants, tax audits and reserves, and developments in pending employment litigation.
The independent accountant conducted a review of the interim financial statements, not a full audit, and reported no material modifications that should be made.