01—Abstract
Summary
Summary of the 10-K filed April 28, 2000. Cited figures are marked; the original filing is the authoritative source.
Ross Stores (ROST) closed fiscal 1999 (ended January 29, 2000) with record results: sales rose 13% to $2.47 billiona, driven by 34 net new stores (378 total, up from 349) and a 6% comparable store sales increase.
Net earnings grew 12% to $150.1 millionb, and diluted EPS rose 17% to $1.64 (or $1.71 excluding the $9.0 million, $0.06-per-share California overtime litigation charge). Gross margin improved, with cost of goods sold and occupancy falling to 69.0% of sales from 69.4%, aided by more opportunistic buying, higher initial markups, and lower markdowns. Return on average equity held at a strong 33%.
Operating expenses rose modestly as a share of sales, mainly from benefits, credit card fees, and incentive compensation. The balance sheet remains conservative, with zero debt, $79.3 millionc in cash, and $273 million in net property. Operating cash flow was $183.4 million, slightly down from $200.5 million, largely because accounts payable grew less than inventory.
Management returned substantial capital to shareholders: it repurchased $120 milliond of stock in 1999, raised the quarterly dividend 15% to $0.0375, and authorized a new $300 million, two-year buyback program. Management expects about 30 net new stores in 2000 and 35 to 40 in 2001, and an effective tax rate near 39%. Investors should weigh several risks.
Ross is heavily concentrated in California, which accounts for 42% of stores, the corporate headquarters, and one of its distribution centers. The company also faces intensifying off-price and department store competition, a seasonal business in which the fourth quarter generates a significant share of profit, and the potential for higher-than-expected settlement costs in the California overtime class action. The filing also notes that a new distribution center is planned for 2002.
02—Key points
Key Highlights
- Sales grew 13% to $2.47 billion in fiscal 1999, with comparable store sales up 6% and 34 net new stores opened (378 total at year-end).
- Net earnings rose 12% to $150.1 million, and diluted EPS increased 17% to $1.64; excluding the $9.0 million litigation charge, EPS would have been about $1.71.
- Gross margin improved: cost of goods sold and occupancy fell to 69.0% of sales from 69.4%, reflecting better initial markups, occupancy leverage, and lower markdowns.
- The balance sheet is debt-free, with $79.3 million in cash and equivalents; return on average stockholders' equity was 33%.
- Shareholder returns were significant: $120 million of buybacks in 1999, a 15% dividend increase to $0.0375 per quarter, and a new $300 million two-year repurchase authorization.
- Growth outlook calls for about 30 net new stores in 2000 and 35 to 40 in 2001, funded primarily by operating cash flow and credit facilities.
- Concentration risk: 42% of stores, the corporate headquarters, and one of two distribution centers are in California, and a California downturn or natural disaster could materially affect results.
03—Questions
Frequently Asked Questions
What drove Ross Stores' revenue and earnings growth in fiscal 1999?
Sales growth came from both new stores (34 opened, 5 closed, for net store count growth from 349 to 378) and a 6% increase in comparable store sales. Net earnings increased 12% to $150.1 million. The $9.0 million California litigation charge slightly reduced profit, and the effective tax rate was 39%.
Is Ross Stores' balance sheet strong enough to support its growth and buybacks?
Yes. The company had no debt at year-end 1999 or 1998, $79.3 million in cash, and $947.7 million in total assets. It has a $160 million revolver and a $30 million letter-of-credit facility, both expiring in September 2002, plus $45 million in uncommitted short-term lines. Current ratio was 1.5:1. Operating cash flow of $183.4 million covered $74 million of capital expenditures, $120 million of buybacks, and dividends.
What is the litigation risk related to the California store managers' lawsuit?
The company recorded a $9.0 million pre-tax charge in fiscal 1999 to resolve a class action alleging that California store managers and assistant managers were improperly classified as exempt from overtime laws. A preliminary settlement is in place, but final terms and court approval are pending, and the filing warns that settlement costs could exceed the amount accrued. Management believes other legal matters will not have a material adverse effect.
What are the main risks and seasonal considerations for investors?
Key risks include intense competition from department stores, specialty stores, discount retailers, and other off-price chains; the company's dependence on obtaining attractive name-brand merchandise at deep discounts; geographic concentration in California; and unseasonable weather or shifts in consumer spending. The business is highly seasonal, with the third and fourth quarters historically generating most of the year's sales and a significant portion of profits in the fourth quarter. The company also warns that there is no assurance that its growth strategy will continue to produce revenue and profit growth.
How is management allocating capital, and what does the buyback program mean for shareholders?
Management is funding a $300 million, two-year repurchase program authorized in January 2000 through operating cash flow and credit facilities. Ross bought back $120 million of stock in 1999 at an average price of $22.07 per share, and $110 million in 1998. The quarterly dividend was raised 15% to $0.0375. Repurchases reduce the share count, which supports EPS growth; the filing notes the company intends to complete the program at prices that are accretive to earnings per share.
04—Continue