What drove Ross Stores' strong earnings growth in fiscal 2002?

Earnings growth was driven mainly by sales leverage. Comparable store sales rose 7%, which improved the company's fixed-cost absorption across store operating expenses and buying, distribution, and occupancy costs. Merchandise margins also improved by about 15 basis points, helped by lower markdowns and better shortage results, and a lower share count from buybacks boosted diluted EPS.

How much debt does Ross Stores carry, and is it a concern?

Reported debt is modest: $25 million of senior unsecured term loan due December 2006, with no borrowings under the $350 million revolver. However, the company also has off-balance-sheet synthetic lease commitments totaling about $167 million, including the $87.3 million South Carolina facility and the $80 million Perris facility, which carry residual value guarantees. Under FIN 46, the Perris lease is expected to be consolidated beginning in Q3 2003, which would increase reported debt.

What are the main risks to Ross Stores' growth outlook?

The filing highlights several risks: a deterioration in economic trends, intense competition from department, specialty, and other off-price retailers, the ability to secure acceptable store sites and continue buying brand-name merchandise at attractive discounts, and the timely opening of the Perris distribution center. Geographic concentration is also significant, since about 35% of stores and the headquarters are in California, and the company notes no assurance that its growth strategy will continue.

How is Ross Stores returning capital to shareholders?

The company repurchased $150 million of common stock in 2002 under a $300 million two-year program, with the remaining $150 million expected to be completed in 2003. The quarterly dividend was raised to $0.0575 per share, from $0.0475 in 2002, and total dividends declared for 2002 were $0.20 per share, up from $0.175 in 2001.

What should investors watch for in the coming year?

Key items include the Perris, California distribution center, which is slated to become the primary West Coast facility in Q3 2003 and is a major execution milestone. Investors should also watch the roughly $150 million 2003 capex plan for about 66 new stores, the impact of FIN 46 on reported debt and depreciation (about $2.3 million annually on Perris), completion of the remaining $150 million buyback, and whether comparable store sales growth can sustain the 2002 margin gains. Management guides to an effective tax rate of about 39%.

ROST 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 23, 2003. Cited figures are marked; the original filing is the authoritative source.

Ross Stores (ROST) reported a strong fiscal 2002 (year ended February 1, 2003).

Sales rose 18% to $3.53 billion^a, driven by a 7% comparable store sales increase and the opening of 60 new stores, bringing the chain to 507 stores across 23 states and Guam. Gross margin improvement came from higher leverage on buying, distribution and occupancy costs, and net earnings rose about 30% to $201.2 million. Diluted EPS increased 32% to $2.52, aided by a 2% reduction in weighted average diluted shares from buybacks.

Net earnings as a percent of sales expanded to 5.7% from 5.2%. Cash generation and the balance sheet were solid. Operating cash flow reached $332.4 million, cash rose to $150.6 million^b, and the company had no borrowings under its $350 million revolver.

Ross repurchased $150 million^c of stock in 2002 and plans to complete the remaining $150 million of its two-year program in 2003. Management expects roughly $150 million of capital expenditures in 2003 to open about 66 stores. Long-term debt is limited to a $25 million term loan, with the remaining $25 million drawn in February 2003.

The key watch items for investors are the off-track real estate and distribution commitments and the accounting change they bring. The company uses synthetic leases to finance its Fort Mill, South Carolina distribution center ($87.3 million^d) and its Perris, California distribution center ($80 million).

Under FIN 46, the Perris facility would likely have to be consolidated starting in Q3 2003, adding roughly $80 million of property and debt. The company also notes that about 35% of its stores and its headquarters are in California, creating geographic concentration risk, and that there is no assurance the growth trajectory will continue.

02—Key points

Key Highlights

Sales grew 18% to $3.53 billion in fiscal 2002, with comparable store sales up 7%, versus 3% in 2001.
Net earnings rose about 30% to $201.2 million; diluted EPS increased 32% to $2.52, and the net margin improved to 5.7% from 5.2%.
Operating cash flow of $332.4 million funded $133.2 million in capital expenditures and $150 million of share repurchases, while cash ended at $150.6 million.
The company opened 60 stores in 2002, ending the year with 507 stores, and plans about 66 new stores in 2003.
Balance sheet remains conservative: $25 million of long-term debt against a $350 million undrawn revolver, with a current ratio of 1.5:1.
Synthetic lease commitments of $87.3 million (Fort Mill) and $80 million (Perris) may require consolidation under FIN 46 starting in Q3 2003, adding about $80 million of property and debt.
Expansion of the 2003 capex plan to about $150 million and the Perris distribution center opening in Q3 2003 are key execution milestones.

03—Questions

Frequently Asked Questions

What drove Ross Stores' strong earnings growth in fiscal 2002?
Earnings growth was driven mainly by sales leverage. Comparable store sales rose 7%, which improved the company's fixed-cost absorption across store operating expenses and buying, distribution, and occupancy costs. Merchandise margins also improved by about 15 basis points, helped by lower markdowns and better shortage results, and a lower share count from buybacks boosted diluted EPS.
How much debt does Ross Stores carry, and is it a concern?
Reported debt is modest: $25 million of senior unsecured term loan due December 2006, with no borrowings under the $350 million revolver. However, the company also has off-balance-sheet synthetic lease commitments totaling about $167 million, including the $87.3 million South Carolina facility and the $80 million Perris facility, which carry residual value guarantees. Under FIN 46, the Perris lease is expected to be consolidated beginning in Q3 2003, which would increase reported debt.
What are the main risks to Ross Stores' growth outlook?
The filing highlights several risks: a deterioration in economic trends, intense competition from department, specialty, and other off-price retailers, the ability to secure acceptable store sites and continue buying brand-name merchandise at attractive discounts, and the timely opening of the Perris distribution center. Geographic concentration is also significant, since about 35% of stores and the headquarters are in California, and the company notes no assurance that its growth strategy will continue.
How is Ross Stores returning capital to shareholders?
The company repurchased $150 million of common stock in 2002 under a $300 million two-year program, with the remaining $150 million expected to be completed in 2003. The quarterly dividend was raised to $0.0575 per share, from $0.0475 in 2002, and total dividends declared for 2002 were $0.20 per share, up from $0.175 in 2001.
What should investors watch for in the coming year?
Key items include the Perris, California distribution center, which is slated to become the primary West Coast facility in Q3 2003 and is a major execution milestone. Investors should also watch the roughly $150 million 2003 capex plan for about 66 new stores, the impact of FIN 46 on reported debt and depreciation (about $2.3 million annually on Perris), completion of the remaining $150 million buyback, and whether comparable store sales growth can sustain the 2002 margin gains. Management guides to an effective tax rate of about 39%.

04—Continue

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