Why did Ross's earnings grow faster than its comparable store sales in fiscal 2003?

Total sales grew 11%, mostly from opening 61 net new stores, while comparable store sales rose just 1%. Net earnings grew about 13% because SG&A fell as a share of sales (to 16.0% from 16.2%), largely from lower benefit-related costs, and distribution efficiencies offset higher occupancy costs. Gross margin itself was flat at 74.4% of sales.

What is the potential Newark, California write-down, and how large could it be?

Ross is evaluating alternative uses or a sale of its Newark headquarters and distribution center, which will be vacated after the corporate move to Pleasanton in mid-2004. The facility's net book value is about $35 million. Because the Bay Area commercial real estate market is depressed, management says a significant non-cash write-down to fair market value may be required, with the evaluation expected to finish in the first half of 2004.

How is Ross funding its growth, and how much debt does it carry?

Growth is funded mainly from operating cash flow and trade credit. Long-term debt is only $50 million, a senior unsecured term loan used for systems at the Southern California distribution center, and the $350 million revolver was undrawn at year-end. Much of the distribution infrastructure is financed through off-balance-sheet synthetic leases totaling about $143.5 million in other synthetic lease obligations, including residual value guarantees, and operating lease commitments total $1.3 billion.

What is dd's DISCOUNTS and why does it matter to investors?

dd's DISCOUNTS is a new off-price concept aimed at lower-income households, with mostly moderate and discount-store brands at lower price points. Ten initial stores are planned on the West Coast for the second half of 2004, in about 25,000-square-foot prototypes. Management believes the U.S. can support over 500 such stores alongside 1,500 Ross locations. The concept is a long-term growth bet and a new source of execution risk, and it will share some corporate services with Ross.

What growth targets has management set, and what risks could affect them?

Management plans to exceed 1,000 stores and over $7 billion in annual revenue by fiscal 2008. The filing warns that there is no assurance the strategies will continue to drive revenue and profit growth. Key risks include economic and consumer spending trends, competition from department and off-price rivals, the ability to keep buying branded goods at deep discounts, store site availability, and the company's heavy exposure to California (32% of stores plus its headquarters and a major distribution center), which exposes it to state economic downturns and natural disasters.

ROST 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 15, 2004. Cited figures are marked; the original filing is the authoritative source.

Ross Stores (ROST) closed fiscal 2003 (year ended January 31, 2004) with a strong profit year driven by store growth and disciplined cost control.

Sales rose 11% to $3.92 billion^a, comparable store sales grew only 1%, and 66 new stores were opened, bringing the chain to 568 stores across 25 states and Guam. Net earnings grew about 13% to $228.1 million, and diluted EPS rose 17% to $1.47 (post two-for-one split). Gross margin (cost of goods sold at 74.4% of sales) held flat, while SG&A leverage improved slightly to 16.0% of sales, lifting the net margin to 5.8%.

The balance sheet is solid and liquidity is strong. Cash rose to $201.5 million^b, stockholders' equity reached $755.4 million, and the company carried only $50 million of long-term debt. The company repurchased $150 million of stock in each of 2003 and 2002 and approved a new $350 million two-year buyback for 2004-2005, alongside a dividend increase to $.0425 per quarter.

Working capital improved to $409 million^c, although accounts payable leverage slipped from 55% to 53%, which pressured operating cash flow (down to $315 million from $349 million). The key forward-looking risks for investors are the company's heavy reliance on California (32% of stores plus its headquarters and key distribution center), a possible non-cash write-down of the Newark, CA headquarters and distribution center (book value about $35 million) given a depressed Bay Area real estate market, rising lease and synthetic lease obligations, and the planned launch of dd's DISCOUNTS, a lower-income-focused concept, in the second half of 2004. Management targets over 1,000 stores and more than $7 billion in revenue by fiscal 2008, but notes that comparable store growth slowed sharply to 1% in 2003 from 7% in 2002.

02—Key points

Key Highlights

Sales grew 11% to $3.92 billion in fiscal 2003, but comparable store sales increased only 1%, down from 7% in 2002, meaning growth came mainly from new stores.
Net earnings rose about 13% to $228.1 million; diluted EPS increased 17% to $1.47, aided by lower SG&A as a percentage of sales (16.0% vs. 16.2%) and a fall in diluted share count of about 3%.
Store base expanded to 568 stores (66 opened, 5 closed) in 25 states and Guam, with entry into Louisiana and Tennessee; management plans roughly 70 net new Ross stores plus 10 dd's DISCOUNTS locations in 2004.
Gross margin held flat with cost of goods sold at 74.4% of sales, while distribution costs improved about 25 basis points, offset by higher store occupancy costs.
Balance sheet remains strong: $201.5 million cash, $50 million long-term debt, $409 million working capital, and stockholders' equity of $755 million; no borrowings under the $350 million revolver.
Capital returns continue: $150 million in buybacks in each of 2003 and 2002, a new $350 million two-year repurchase program approved for 2004-2005, and the quarterly dividend raised to $.0425.
Risk items to watch: a potential write-down of the Newark, CA facility (book value about $35 million) and heavy California concentration (32% of stores), plus operating cash flow declining to $315 million as accounts payable leverage fell to 53%.

03—Questions

Frequently Asked Questions

Why did Ross's earnings grow faster than its comparable store sales in fiscal 2003?
Total sales grew 11%, mostly from opening 61 net new stores, while comparable store sales rose just 1%. Net earnings grew about 13% because SG&A fell as a share of sales (to 16.0% from 16.2%), largely from lower benefit-related costs, and distribution efficiencies offset higher occupancy costs. Gross margin itself was flat at 74.4% of sales.
What is the potential Newark, California write-down, and how large could it be?
Ross is evaluating alternative uses or a sale of its Newark headquarters and distribution center, which will be vacated after the corporate move to Pleasanton in mid-2004. The facility's net book value is about $35 million. Because the Bay Area commercial real estate market is depressed, management says a significant non-cash write-down to fair market value may be required, with the evaluation expected to finish in the first half of 2004.
How is Ross funding its growth, and how much debt does it carry?
Growth is funded mainly from operating cash flow and trade credit. Long-term debt is only $50 million, a senior unsecured term loan used for systems at the Southern California distribution center, and the $350 million revolver was undrawn at year-end. Much of the distribution infrastructure is financed through off-balance-sheet synthetic leases totaling about $143.5 million in other synthetic lease obligations, including residual value guarantees, and operating lease commitments total $1.3 billion.
What is dd's DISCOUNTS and why does it matter to investors?
dd's DISCOUNTS is a new off-price concept aimed at lower-income households, with mostly moderate and discount-store brands at lower price points. Ten initial stores are planned on the West Coast for the second half of 2004, in about 25,000-square-foot prototypes. Management believes the U.S. can support over 500 such stores alongside 1,500 Ross locations. The concept is a long-term growth bet and a new source of execution risk, and it will share some corporate services with Ross.
What growth targets has management set, and what risks could affect them?
Management plans to exceed 1,000 stores and over $7 billion in annual revenue by fiscal 2008. The filing warns that there is no assurance the strategies will continue to drive revenue and profit growth. Key risks include economic and consumer spending trends, competition from department and off-price rivals, the ability to keep buying branded goods at deep discounts, store site availability, and the company's heavy exposure to California (32% of stores plus its headquarters and a major distribution center), which exposes it to state economic downturns and natural disasters.

04—Continue

← View all 10-K filings