Why did Ross's earnings decline in fiscal 1993 despite higher sales?

Sales grew 7.6% from new stores, but comparable store sales fell 1% as the value gap versus department and specialty stores narrowed. Cost of goods sold and occupancy rose to 72.6% of sales from 71.2% due to pricing pressure and heavier markdowns, and net earnings fell 14% to $29.3 million.

What is Ross's strategy for improving results in 1994?

Management plans larger discounts on key name-brand items to drive traffic and sales per square foot. It is not counting on gross margin gains and expects earnings growth to come from sales increases and leverage on operating expenses as a percentage of sales.

How financially sound is Ross, and how will it fund growth and shareholder returns?

Debt is modest at $33.3 million, about 13% of capitalization, and includes a $23 million term loan due November 1994 that management intends to refinance. A $110 million revolving credit facility is available, and operating cash flow of $39.9 million covers planned openings of 20 to 25 stores a year, the dividend, and buybacks.

What operational risks emerged in early 1994?

A March 1994 section roof collapse at the Carlisle, Pennsylvania distribution center, caused by heavy snow, disrupted East Coast distribution. Newark, California is supporting flows in the interim, and the company expects the facility to return to normal capacity by June 1994 and says it is fully insured.

How concentrated is Ross's business in terms of customers, vendors, and seasonality?

No single vendor accounted for more than 1% of purchases in the past three years, and no single store exceeded 2% of sales. The business is seasonal, with the third and fourth quarters producing higher sales and the fourth quarter generating a significant share of annual profit, so holiday-season pricing or demand shortfalls could materially affect results.

ROST 10-K FY1994 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 28, 1994. Cited figures are marked; the original filing is the authoritative source.

Ross Stores, Inc. (ROST) reported fiscal 1993 (year ended January 29, 1994) sales of $1.122 billion^a, up 7.6% from $1.043 billion, driven by a larger store base rather than same-store growth.

Comparable store sales declined 1%, the first decline in the period shown, as the company's off-price value advantage narrowed amid a more competitive apparel retail environment. Net earnings fell 14% to $29.3 million^b, or $1.14 per fully-diluted share, from $34.0 million, or $1.30 a year earlier. Margin pressure was concentrated in cost of goods sold and occupancy, which rose to 72.6% of sales from 71.2%, reflecting heavier markdowns and price-point pressure.

General, selling and administrative expenses improved slightly to 21.0% of sales from 21.3%. The balance sheet remains conservative. Stockholders' equity rose to $228.2 million^c, and total debt was $33.3 million, or 13% of total capitalization, against $125 million of working capital and a 1.8:1 current ratio.

Management repurchased 1.2 million shares at an average of $14.89^d and initiated a quarterly dividend of $0.05 per share. A two million share repurchase plan is still in progress. The company plans to open 20 to 25 stores annually through 1995 and expects to fund growth primarily from operating cash flow and existing credit facilities.

Investors should weigh several items. Management says it will not rely on gross margin expansion in 1994, instead targeting sales growth and expense leverage, and will deepen discounts on key brands to improve sales per square foot. A March 1994 roof collapse at the Carlisle, Pennsylvania distribution center disrupted East Coast flows, and the company expects normal capacity by June 1994 and says it is fully insured.

The company also disclosed a $23 million term loan due November 1994 that it intends to refinance. Fourth-quarter results drive a large share of annual profit, so seasonal performance is a key sensitivity.

02—Key points

Key Highlights

Sales rose 7.6% to $1.122 billion in fiscal 1993, but comparable store sales fell 1%, reversing 3% growth in 1992; growth came from opening 22 stores, bringing the total to 243.
Net earnings declined 14% to $29.3 million ($1.14 per fully-diluted share) from $34.0 million ($1.30), as cost of goods sold and occupancy rose to 72.6% of sales from 71.2%.
Balance sheet is conservative: total debt of $33.3 million equals 13% of total capitalization, working capital is $125 million, and the current ratio is 1.8:1.
Stockholders' equity increased to $228.2 million, or $9.24 per share, from $209.6 million, while the company repurchased 1.2 million shares at an average of $14.89.
Initiated the first quarterly cash dividend of $0.05 per share, with a March 11, 1994 record date, and has a two million share repurchase program still underway.
Management expects 2014-style margin relief to come from sales growth and expense leverage rather than gross margin, with planned deeper discounts on key brands to lift sales per square foot.
A March 1994 roof collapse at the Carlisle, PA distribution center is expected to be resolved by June 1994; the company says it is fully insured.

03—Questions

Frequently Asked Questions

Why did Ross's earnings decline in fiscal 1993 despite higher sales?
Sales grew 7.6% from new stores, but comparable store sales fell 1% as the value gap versus department and specialty stores narrowed. Cost of goods sold and occupancy rose to 72.6% of sales from 71.2% due to pricing pressure and heavier markdowns, and net earnings fell 14% to $29.3 million.
What is Ross's strategy for improving results in 1994?
Management plans larger discounts on key name-brand items to drive traffic and sales per square foot. It is not counting on gross margin gains and expects earnings growth to come from sales increases and leverage on operating expenses as a percentage of sales.
How financially sound is Ross, and how will it fund growth and shareholder returns?
Debt is modest at $33.3 million, about 13% of capitalization, and includes a $23 million term loan due November 1994 that management intends to refinance. A $110 million revolving credit facility is available, and operating cash flow of $39.9 million covers planned openings of 20 to 25 stores a year, the dividend, and buybacks.
What operational risks emerged in early 1994?
A March 1994 section roof collapse at the Carlisle, Pennsylvania distribution center, caused by heavy snow, disrupted East Coast distribution. Newark, California is supporting flows in the interim, and the company expects the facility to return to normal capacity by June 1994 and says it is fully insured.
How concentrated is Ross's business in terms of customers, vendors, and seasonality?
No single vendor accounted for more than 1% of purchases in the past three years, and no single store exceeded 2% of sales. The business is seasonal, with the third and fourth quarters producing higher sales and the fourth quarter generating a significant share of annual profit, so holiday-season pricing or demand shortfalls could materially affect results.

04—Continue

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