10-QPeriod: Q2 FY2019

ROSS STORES, INC. Quarterly Report for Q2 Ended Aug 4, 2018

Filed September 12, 2018For Securities:ROST

Summary

Ross Stores, Inc. reported a strong second quarter for fiscal year 2018, with net sales increasing by 8.9% to $3.7 billion and diluted earnings per share rising to $1.04, a significant jump from $0.82 in the prior year period. This growth was driven by both a 5% increase in comparable store sales and the addition of new store locations. The company's off-price model continues to resonate with consumers, evidenced by robust sales across its Ross and dd's DISCOUNTS banners. The company also benefited from a lower effective tax rate due to the Tax Cuts and Jobs Act, which contributed to net earnings as a percentage of sales increasing to 10.4% from 9.2% in the prior year. Ross Stores demonstrated effective capital allocation through significant stock repurchases and an increased dividend payout, underscoring its commitment to returning value to shareholders. Management expressed confidence in the company's liquidity and ability to fund future investments and shareholder returns.

Financial Highlights

50 data points
Beta

Revenue

$3.74B

28.7% Gross Margin

Net Income

$389.40M

10.4% Net Margin

EPS (Diluted)

$1.04

Total Assets

$5.96B

Cash & Equivalents

$1.39B

Free Cash Flow

$443.29M

Financial Statements
Beta
Revenue$3.74B
Cost of Revenue$2.67B
Gross Profit$1.07B
SG&A Expenses$554.58M
Operating Expenses$3.22B
Interest Expense$4.65M
Net Income$389.40M
EPS (Basic)$1.05
EPS (Diluted)$1.04
Shares Outstanding (Basic)371.03M
Shares Outstanding (Diluted)373.72M

Key Highlights

  • 1Net sales increased by 8.9% to $3.7 billion for the three months ended August 4, 2018.
  • 2Comparable store sales increased by 5% for the three months ended August 4, 2018.
  • 3Diluted earnings per share (EPS) grew to $1.04 from $0.82 year-over-year, a 27% increase.
  • 4The effective tax rate decreased significantly to 25% from 38% due to the Tax Cuts and Jobs Act, boosting net earnings.
  • 5The company repurchased approximately $528.6 million of common stock and paid $170.0 million in dividends during the six-month period, demonstrating strong capital return.
  • 6Store count increased to 1,680 locations by the end of the period, reflecting continued expansion.
  • 7Cost of goods sold as a percentage of sales increased slightly, primarily due to higher distribution and freight costs, but merchandise margin improved.

Frequently Asked Questions

The increase in diluted earnings per share to $1.04 was driven by a combination of higher net sales (up 8.9%), a 5% increase in comparable store sales, and a significantly lower effective tax rate resulting from the Tax Cuts and Jobs Act. Additionally, a reduction in weighted average diluted shares outstanding due to stock repurchases also contributed to the EPS growth.

For the three-month period, cost of goods sold as a percentage of sales increased by approximately 80 basis points. This was primarily due to higher distribution and freight costs, partially offset by an improvement in merchandise margin and lower occupancy and buying costs. The company continues to manage its inventory through replenishment and markdown strategies, and reported that packaway inventory represented 44% of total inventory, down from 49% in the prior year.

Ross Stores continues its expansion strategy, opening 30 new stores in the quarter, bringing the total to 1,680 locations. The company forecasts approximately $475 million in capital expenditures for fiscal year 2018, primarily for new and existing store improvements, distribution centers, and IT systems. Furthermore, the company demonstrated a strong commitment to shareholder returns by repurchasing $528.6 million in stock and paying $170.0 million in dividends during the six-month period, with an additional $200 million increase to its stock repurchase authorization.

The Tax Cuts and Jobs Act significantly reduced the U.S. federal corporate income tax rate from 35% to 21%. This resulted in a lower effective tax rate for Ross Stores, decreasing from 38% to 25% for the three-month period and 37% to 24% for the six-month period, which directly benefited net earnings. The company recorded provisional amounts related to this tax reform in fiscal 2017 and has not yet recorded any adjustments as of August 4, 2018.