10-QPeriod: Q3 FY2005

ROSS STORES, INC. Quarterly Report for Q3 Ended Oct 30, 2004

Filed December 9, 2004For Securities:ROST

Summary

Ross Stores, Inc. (ROST) reported financial results for the third quarter and nine months ending October 30, 2004. While overall sales saw a modest increase driven by new store openings, comparable store sales experienced a decline in both periods (down 3% for the quarter and 1% year-to-date). This decline, coupled with increased cost of goods sold primarily due to higher distribution, logistics, and markdown costs, led to a significant decrease in net earnings and diluted earnings per share. The company is actively expanding its store footprint with 83 new stores opened year-to-date and is introducing a new concept, dd's DISCOUNTS, targeting a lower-income demographic. Despite these operational challenges, the company maintained strong liquidity, with significant cash flow from operations and a substantial revolving credit facility. Management is focused on addressing issues with a recently implemented Core Merchandising System, which has adversely impacted sales and earnings, and expects these issues to be resolved by the end of fiscal year 2004. The company also continued its stock repurchase program and paid quarterly dividends.

Key Highlights

  • 1Total sales increased 5.2% for the third quarter and 7.3% for the nine months, driven by new store openings.
  • 2Comparable store sales declined by 3% for the quarter and 1% for the nine months, indicating pressure on existing store performance.
  • 3Cost of goods sold as a percentage of sales increased significantly (350 bps for the quarter, 220 bps for the nine months) due to higher distribution/logistics costs, increased markdowns, and dd's DISCOUNTS expansion.
  • 4Net earnings decreased by 21% for the quarter and 20% for the nine months, with diluted EPS also declining significantly.
  • 5The company opened 83 new stores year-to-date and is pursuing an aggressive expansion strategy aiming for over 1,000 stores by fiscal 2008.
  • 6A new Core Merchandising System implementation faced difficulties, adversely affecting sales and earnings, though progress is being made towards resolution.
  • 7The company repurchased approximately $150 million of its stock and paid dividends, demonstrating a commitment to shareholder returns.

Frequently Asked Questions

The decrease in net earnings and diluted EPS was primarily driven by a significant increase in the cost of goods sold as a percentage of sales. This was attributed to higher distribution and logistics costs (partly due to new systems), increased markdowns and lower initial markups, reduced leverage from declining comparable store sales, and costs associated with the new dd's DISCOUNTSSM concept. Additionally, a 3% decrease in comparable store sales during the quarter and a 1% decrease year-to-date negatively impacted profitability.

The recently installed Core Merchandising System has experienced difficulties, leading to adverse effects on third quarter and year-to-date sales and earnings. The company believes these issues have caused inventory imbalances. While progress is being made to resolve these problems, with information for allocation and buying functions largely restored, a residual impact on sales and earnings is expected in the fourth quarter of fiscal 2004.

Ross Stores' primary strategy is to expand its off-price apparel retail business by increasing store count and geographic reach, targeting an aggregate of over 2,000 locations with Ross and dd's DISCOUNTS stores. While the company opened 83 new stores in the first nine months of 2004, contributing to overall sales growth, comparable store sales have declined. This indicates that while expansion is progressing, the performance of existing stores needs improvement, possibly influenced by the merchandising system issues and competitive pressures.

The company maintains strong liquidity through cash flows from operations and a $600 million revolving credit facility, with no borrowings outstanding on this facility as of the reporting date. It continues to repurchase its stock under a $350 million program and has consistently paid quarterly cash dividends. Management expects these resources to be adequate for operating needs, capital investments, stock repurchases, and dividends for at least the next twelve months.