How did Ross Stores perform financially in fiscal 2006?

Sales grew 12.7% to $5.57 billion and net earnings rose about 21% to $241.6 million. Diluted EPS was $1.70, up from $1.36. Growth came from 63 net new stores and a 4% comparable store sales increase, with margin gains from lower markdowns and better distribution costs. Fiscal 2006 had 53 weeks, versus 52 in the prior year, which flatters the year-over-year comparison.

Is Ross's growth coming from new stores or from existing stores?

Both contributed. The 63 net new stores drove most of the 12.7% sales growth, and comparable store sales added 4%. Management plans to open mainly in existing regions to raise market penetration and spread overhead and advertising costs. Investors should watch whether comparable sales growth holds, since the company has said it cannot guarantee continued sales or earnings growth.

How strong is Ross's balance sheet and liquidity?

Cash and equivalents rose to $367.4 million, and operating cash flow was $506.9 million. Long-term debt is $150 million in senior notes due 2018 and 2021, against an undrawn $600 million revolver. Debt is about 14% of total capitalization. The company says operating cash flow and credit lines cover operating needs, capex, buybacks, and dividends for at least the next twelve months. Total contractual obligations are about $2.86 billion, mostly operating lease rent.

What are the main risks to the investment case?

The main risks are consumer spending and fuel prices, competition from department and discount stores, and dependence on California, where 28% of stores and key facilities sit. Labor litigation is also a concern: class actions over assistant store manager classification and meal and rest breaks are pending, and the manager misclassification settlement is already accrued. Other risks include store real estate availability, the cost of integrating former Albertsons sites, and supply chain disruption.

What should investors expect for fiscal 2007?

Management plans about $290 million in capital spending for new stores, remodels, and distribution and systems. It expects an effective tax rate of 38% to 40%, the first benefit from the Albertsons sites, and a $6 to $8 million FIN 48 charge to retained earnings. Ross has also said it will continue to pursue opportunistic real estate, and the 2007 buyback and dividend plans are tied to available cash flow. The filing gives no explicit sales or EPS guidance.

ROST 10-K FY2007 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 3, 2007. Cited figures are marked; the original filing is the authoritative source.

Ross Stores (ROST) closed fiscal 2006 (53 weeks ended February 3, 2007) with record results: sales rose 12.7% to $5.57 billion^a, driven by 63 net new stores (797 total, up 9%) and a 4% comparable store sales increase.

Net earnings grew about 21% to $241.6 million^b, and diluted EPS rose 25% to $1.70, helped by a roughly 3% reduction in diluted share count from buybacks. Net margin improved to 4.3% from 4.0%, mainly because cost of goods sold fell 40 basis points as a percentage of sales on lower markdowns and shortage and better distribution costs. SG&A held flat at 15.5% of sales.

Balance sheet and cash flow strengthened. Operating cash flow reached $506.9 million^c, up from $375.2 million, and the company ended the year with $367.4 million in cash and $1.05 billion in merchandise inventory. Ross issued $150 million of unsecured senior notes (6.38% and 6.53%) and repaid its $50 million term loan.

It also repurchased $200 million^d of stock and paid dividends, with the quarterly dividend raised to $0.075. Management guides to about $290 million in 2007 capital spending, an effective tax rate of 38% to 40%, and about 40 Albertsons sites added to the 2007 expansion program. Key risks include heavy concentration in California (28% of stores, plus the headquarters and two distribution centers), exposure to consumer spending and fuel costs, rising labor-related litigation (assistant store manager misclassification and meal/rest break class actions), and the expense of new store and distribution investments.

The company also expects a cumulative tax reserve charge of $6 to $8 million from FIN 48 adoption. Management cautions that prior growth does not guarantee continued sales or earnings growth.

02—Key points

Key Highlights

Sales up 12.7% to $5.57B; comparable store sales up 4%, with 797 stores at year-end (63 net new).
Net earnings up about 21% to $241.6M; diluted EPS up 25% to $1.70, aided by a roughly 3% lower diluted share count.
Net margin improved to 4.3% from 4.0%, mainly from a 40 bp gross margin gain on lower markdowns and shortage plus a 35 bp distribution cost improvement.
Operating cash flow of $506.9M (up from $375.2M), partly from a $221.6M increase in accounts payable tied to the 53rd week.
Financing: $150M senior notes issued, $50M term loan repaid, $200M of stock repurchased under a $400M two-year program; quarterly dividend raised to $0.075.
Growth pipeline: about 40 former Albertsons sites planned for 2007, roughly $290M in 2007 capex, and a $90M Moreno Valley distribution center expansion.
Concentration risk: 28% of stores plus the headquarters and two distribution centers are in California.

03—Questions

Frequently Asked Questions

How did Ross Stores perform financially in fiscal 2006?
Sales grew 12.7% to $5.57 billion and net earnings rose about 21% to $241.6 million. Diluted EPS was $1.70, up from $1.36. Growth came from 63 net new stores and a 4% comparable store sales increase, with margin gains from lower markdowns and better distribution costs. Fiscal 2006 had 53 weeks, versus 52 in the prior year, which flatters the year-over-year comparison.
Is Ross's growth coming from new stores or from existing stores?
Both contributed. The 63 net new stores drove most of the 12.7% sales growth, and comparable store sales added 4%. Management plans to open mainly in existing regions to raise market penetration and spread overhead and advertising costs. Investors should watch whether comparable sales growth holds, since the company has said it cannot guarantee continued sales or earnings growth.
How strong is Ross's balance sheet and liquidity?
Cash and equivalents rose to $367.4 million, and operating cash flow was $506.9 million. Long-term debt is $150 million in senior notes due 2018 and 2021, against an undrawn $600 million revolver. Debt is about 14% of total capitalization. The company says operating cash flow and credit lines cover operating needs, capex, buybacks, and dividends for at least the next twelve months. Total contractual obligations are about $2.86 billion, mostly operating lease rent.
What are the main risks to the investment case?
The main risks are consumer spending and fuel prices, competition from department and discount stores, and dependence on California, where 28% of stores and key facilities sit. Labor litigation is also a concern: class actions over assistant store manager classification and meal and rest breaks are pending, and the manager misclassification settlement is already accrued. Other risks include store real estate availability, the cost of integrating former Albertsons sites, and supply chain disruption.
What should investors expect for fiscal 2007?
Management plans about $290 million in capital spending for new stores, remodels, and distribution and systems. It expects an effective tax rate of 38% to 40%, the first benefit from the Albertsons sites, and a $6 to $8 million FIN 48 charge to retained earnings. Ross has also said it will continue to pursue opportunistic real estate, and the 2007 buyback and dividend plans are tied to available cash flow. The filing gives no explicit sales or EPS guidance.

04—Continue

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