01—Abstract
Summary
Summary of the 10-K filed March 29, 2011. Cited figures are marked; the original filing is the authoritative source.
Ross Stores (ROST) closed fiscal 2010 (ended January 29, 2011) with a strong year.
Sales rose 9.5% to $7.87 billiona, driven by 50 net new stores (to 1,055 total) and a 5% comparable store sales increase. Gross margin expanded roughly 130 basis points, mainly from a 80 basis point improvement in merchandise margin, and net earnings grew about 25% to $554.8 million, or $4.63 diluted EPS (up 31% year over year). Net earnings margin reached 7.1%, up from 6.2%, and return on average equity was 45%.
Cash generation was solid but softer than the prior year. Operating cash flow fell to $673.0 millionb from $888.4 million, primarily because the company bought more packaway inventory at year-end; packaway now represents 47% of total inventory, up from 38%, and accounts payable leverage declined to 71%. Ross returned capital aggressively: it repurchased $375 million of stock, paid $77 million in dividends, and the board raised the quarterly dividend to $0.22 (from $0.16), while approving a new two-year $900 million buyback for fiscal 2011 and 2012.
Cash ended at $834 millionc with no borrowings under its $600 million revolver, which was refinanced in March 2011. Looking ahead, management plans to reduce average store inventory levels, keep operating expenses tightly controlled, and spend $380 to $390 million on capital expenditures in 2011, largely for new stores and dd's DISCOUNTS expansion.
Key risks include concentration in California (26%d of stores, plus headquarters and two distribution centers), sensitivity to consumer spending and macroeconomic conditions, ongoing wage-and-hour class action litigation, and reliance on the availability of discounted brand-name merchandise. Management also notes it cannot guarantee that current margin and sales gains will continue.
02—Key points
Key Highlights
- Sales rose 9.5% to $7.87 billion, with comparable store sales up 5% and 50 net new stores opened (1,055 total at year-end).
- Diluted EPS increased 31% to $4.63 from $3.54, with net earnings up about 25% to $554.8 million.
- Cost of goods sold improved to 72.8% of sales from 74.2%, reflecting an 80 basis point gain in merchandise margin and lower occupancy and distribution costs.
- Operating cash flow fell to $673.0 million from $888.4 million as the company built packaway inventory to 47% of total inventory (from 38%).
- Shareholder returns were significant: $375 million in buybacks and $77 million in dividends paid in fiscal 2010, with the quarterly dividend raised to $0.22 and a new $900 million two-year repurchase program authorized.
- Balance sheet remains strong, with $834 million in cash, $150 million in senior notes, and an undrawn $600 million revolving credit facility, which was refinanced in March 2011.
- Fiscal 2011 outlook includes $380 to $390 million in capital expenditures, a planned reduction in average store inventory, and an expected effective tax rate of about 38%.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed March 29, 2011Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $7.87B$7.18B | +9.5% |
| Cost of Revenue | $5.73B$5.33B | +7.6% |
| Gross Profit | $2.14B$1.86B | +15.0% |
| SG&A Expenses | $1.23B$1.13B | +8.8% |
| Operating Expenses | $6.97B$6.47B | +7.8% |
| Net Income | $554.80M$442.76M | +25.3% |
| EPS (Basic) | $1.18$0.90 | +30.6% |
| EPS (Diluted) | $1.16$0.89 | +30.5% |
| Shares Outstanding (Basic) | 471.28M491.55M | −4.1% |
| Shares Outstanding (Diluted) | 479.61M500.06M | −4.1% |
05—Questions
Frequently Asked Questions
What drove Ross Stores' earnings growth in fiscal 2010?
Earnings growth came from both top-line expansion and margin improvement. Sales rose 9.5% on 50 net new stores and a 5% comparable store sales gain. Cost of goods sold fell to 72.8% of sales from 74.2%, mainly due to a merchandise margin gain of about 80 basis points, plus benefits from occupancy leverage and lower distribution costs. SG&A held roughly flat as a percentage of sales at 15.6%.
Why did operating cash flow decline in 2010 even though earnings rose?
Operating cash flow dropped to $673.0 million from $888.4 million mainly because the company purchased a larger amount of packaway inventory at year-end. Packaway rose to 47% of inventory from 38%, and accounts payable leverage fell to 71% from 75%. Management attributes this to opportunistic close-out buying rather than weakening operations, though investors should watch whether inventory turns normalize.
How much is Ross returning to shareholders, and is the dividend sustainable?
In fiscal 2010, Ross repurchased $375 million of stock and paid $77.3 million in dividends. The quarterly dividend was raised to $0.22 per share from $0.16, and a new $900 million two-year buyback was authorized for fiscal 2011 and 2012. Net earnings of $554.8 million and operating cash flow of $673 million comfortably cover these payouts, and the company ended the year with $834 million in cash and no revolver borrowings.
What are the main risks to Ross Stores' business?
The main risks include concentration in California, where 26% of stores as well as the headquarters, Los Angeles buying office, and two distribution centers are located; sensitivity to consumer spending and macroeconomic conditions; the ability to secure attractive brand-name merchandise at deep discounts; supply chain disruption; and the execution of store growth and new market entry. The company also faces ongoing California wage-and-hour class action lawsuits, though management does not expect them to be materially adverse.
What is the growth outlook for 2011?
Management plans to open stores in existing states and enter new states for both Ross and dd's DISCOUNTS, and forecasts $380 to $390 million in capital expenditures for 2011. It also intends to reduce average store inventory levels and maintain strict control over operating expenses. The company expects a tax rate of about 38%. However, management explicitly cautions that it cannot guarantee continued sales or earnings growth.
06—Continue