ROSS STORES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
This section and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such differences include, but are not limited to, those
discussed in Part II, Item 1A (Risk Factors) below. The following discussion
should be read in conjunction with the condensed consolidated financial
statements and notes thereto included elsewhere in this Quarterly Report on Form
10-Q and the consolidated financial statements and notes thereto in our Annual
Report on Form 10-K for 2013. All information is based on our fiscal calendar.
Ross Stores, Inc. operates two brands of off-price retail apparel and home
fashion stores -- Ross Dress for Less® ("Ross") and dd's DISCOUNTS®. Ross is the
largest off-price apparel and home fashion chain in the United States with 1,172
locations in 33 states, the District of Columbia and Guam as of May 3, 2014.
Ross offers first-quality, in-season, name brand and designer apparel,
accessories, footwear, and home fashions for the entire family at everyday
savings of 20% to 60% off department and specialty store regular prices. We also
operate 137 dd's DISCOUNTS stores in 10 states that feature a more
moderately-priced assortment of first-quality, in-season, name brand apparel,
accessories, footwear, and home fashions for the entire family at everyday
savings of 20% to 70% off moderate department and discount store regular prices
as of May 3, 2014.
Results of Operations
The following table summarizes the financial results for the three month periods
ended May 3, 2014 and May 4, 2013:
Three Months Ended
May 3, 2014 May 4, 2013
Sales (millions) $ 2,681 $ 2,540
Sales growth 5.5 % 7.8 %
Comparable store sales growth 1 % 3 %
Costs and expenses (as a percent of sales)
Cost of goods sold 71.2 % 70.8 %
Selling, general and administrative 14.2 % 14.3 %
Interest (income) expense, net 0.0 % 0.0 %
Earnings before taxes (as a percent of sales) 14.6 % 14.9 %
Net earnings (as a percent of sales) 9.1 % 9.2 %
Stores. Our expansion strategy is to open additional stores based on market
penetration, local demographic characteristics, competition, expected store
profitability, and the ability to leverage overhead expenses. We continually
evaluate opportunistic real estate acquisitions and opportunities for potential
new store locations. We also evaluate our current store locations and determine
store closures based on similar criteria.
Three Months Ended
Store Count May 3, 2014 May 4, 2013
Beginning of the period 1,276 1,199
Opened in the period 37 28
Closed in the period (4 ) -
End of the period 1,309 1,227
Sales. Sales for the three month period ended May 3, 2014 increased $140.7
million, or 6%, compared to the three month period ended May 4, 2013, due to the
opening of 82 net new stores between May 4, 2013 and May 3, 2014 and a 1%
increase in "comparable" store sales (defined as stores that have been open for
more than 14 complete months).
Our sales mix for the three month periods ended May 3, 2014 and May 4, 2013 is
Three Months Ended
May 3, 2014 May 4, 2013
Ladies 31 % 31 %
Home Accents and Bed and Bath 23 % 22 %
Shoes 13 % 14 %
Accessories, Lingerie, Fine Jewelry, and Fragrances 13 % 13 %
Men's 12 % 12 %
Children's 8 % 8 %
Total 100 % 100 %
We intend to address the competitive climate for off-price apparel and home
goods by pursuing and refining our existing strategies and by continuing to
strengthen our organization, diversify our merchandise mix, and more fully
develop our systems to improve regional and local merchandise offerings.
Although our strategies and store expansion program contributed to sales gains
for the three month period ended May 3, 2014, we cannot be sure that they will
result in a continuation of sales growth or in an increase in net earnings.
Cost of goods sold. Cost of goods sold for the three month period ended May 3,
2014 increased $109 million compared to the same period in the prior year,
mainly due to increased sales from the opening of 82 net new stores between
May 4, 2013 and May 3, 2014 and a 1% increase in comparable store sales.
Cost of goods sold as a percentage of sales for the three month period ended
May 3, 2014 increased approximately 35 basis points from the same period in
the prior year. This was primarily driven by deleverage from the 1% increase in
comparable store sales on occupancy and buying costs, which increased 20 and 10
basis points, respectively, and from a decline of about 10 basis points in
merchandise margin. These expenses were partially offset by distribution costs
which improved by approximately 5 basis points versus the same period in 2013.
We cannot be sure that the gross profit margins realized for the three month
period ended May 3, 2014 will continue in the future.
Selling, general and administrative expenses. For the three month period ended
May 3, 2014, selling, general and administrative expenses ("SG&A") increased $18
million compared to the same period in the prior year mainly due to increased
store operating costs reflecting the opening of 82 net new stores between May 4,
2013 and May 3, 2014.
Selling, general and administrative expenses as a percentage of sales for the
three month period ended May 3, 2014 declined 10 basis points compared to the
same period in the prior year.
Interest (income) expense, net. Net interest income as a percentage of sales
remained relatively unchanged for the three month period ended May 3, 2014
compared to the same period in the prior year.
Taxes on earnings. Our effective tax rate for both of the three month periods
ended May 3, 2014 and May 4, 2013 was approximately 38%, which represents the
applicable combined federal and state statutory rates reduced by the federal
benefit of state taxes deductible on federal returns. The effective rate is
impacted by changes in law, location of new stores, level of earnings, and the
resolution of tax positions with various taxing authorities. We anticipate that
our effective tax rate for fiscal 2014 will be approximately 38%.
Net earnings. Net earnings as a percentage of sales for the three month period
ended May 3, 2014 declined compared to the same period in the prior year
primarily due to the increase in cost of goods sold.
Earnings per share. Diluted earnings per share for the three month period ended
May 3, 2014 was $1.15 compared to $1.07 in the prior year period. The 7%
increase in diluted earnings per share is attributable to a 4% increase in net
earnings and a 3% reduction in weighted average diluted shares outstanding due
to the stock repurchase program.
Liquidity and Capital Resources
Our primary sources of funds for our business activities are cash flows from
operations and short-term trade credit. Our primary ongoing cash requirements
are for merchandise inventory purchases, payroll, rent, taxes, and capital
expenditures in connection with new and existing stores, and investments in
distribution centers, information systems, and buying and corporate offices. We
also use cash to repurchase stock under our stock repurchase program and to pay
Three Months Ended
($000) May 3, 2014 May 4, 2013Cash provided by operating activities $ 504,577 $ 352,859
Cash used in investing activities
(143,658 ) (109,699 )
Cash used in financing activities (188,137 ) (175,747 )
Net increase in cash and cash equivalents $ 172,782 $ 67,413
Net cash provided by operating activities was $504.6 million and $352.9 million
for the three month periods ended May 3, 2014 and May 4, 2013, respectively, and
was primarily driven by net earnings excluding non-cash expenses for
depreciation and amortization. Our primary source of operating cash flow is the
sale of our merchandise inventory. We regularly review the age and condition of
our merchandise and are able to maintain current merchandise inventory in our
stores through replenishment processes and liquidation of slower-moving
merchandise through clearance markdowns.
The increase in cash flow from operating activities for the three month period
ended May 3, 2014, compared to the same period in the prior year was primarily
due to higher net earnings, an increase in accounts payable leverage (defined as
accounts payable divided by merchandise inventory) and the timing of payments of
certain expenses. The change in total merchandise inventory, net of the change
in accounts payable, resulted in a source of cash of approximately $164 million
for the three months ended May 3, 2014, compared to a source of cash of
approximately $72 million for the three months ended May 4, 2013. Accounts
payable leverage was 74%, 62%, and 70% as of May 3, 2014, February 1, 2014, and
May 4, 2013, respectively. Changes in accounts payable leverage are primarily
driven by the timing of receipts and payments.
As a regular part of our business, packaway inventory levels will vary over time
based on availability of compelling opportunities in the marketplace. Packaway
merchandise is purchased with the intent that it will be stored in our
warehouses until a later date. The timing of the release of packaway inventory
to our stores is principally driven by the product mix and seasonality of the
merchandise, and its relation to our store merchandise assortment plans. As
such, the aging of packaway varies by merchandise category and seasonality of
purchase, but typically packaway remains in storage less than six months. We
expect to continue to take advantage of packaway inventory opportunities to
deliver bargains to our customers.
Changes in packaway inventory levels impact our operating cash flow. As of
May 3, 2014, packaway inventory was 45% of total inventory compared to 49% at
the end of fiscal 2013. At the end of the first quarter for fiscal 2013,
packaway inventory was 45% of total inventory compared to 47% at the end of
Net cash used in investing activities was $143.7 million and $109.7 million for
the three month periods ended May 3, 2014 and May 4, 2013, respectively. The
increase in cash used for investing activities for the three month period ended
May 3, 2014, compared to the three month period ended May 4, 2013 was primarily
due to an increase in our capital expenditures.
Our capital expenditures were $148.7 million and $97.6 million for the three
month periods ended May 3, 2014 and May 4, 2013, respectively. Our capital
expenditures include costs to build or expand distribution centers, open new
stores and improve existing stores, and for various other expenditures related
to our information technology systems, buying, and corporate offices.
In October 2013, we entered into a Sale-Purchase Agreement under which we have
the right to purchase the office building where our New York buying office is
located for $222 million. The building is subject to a 99 year ground lease
through June 2111. The Sale-Purchase Agreement contemplates completion of the
sale and purchase of the building on or before September 20, 2014, subject to
satisfaction of various closing conditions. Under the Sale-Purchase Agreement,
we provided a deposit of 10% of the purchase price. In the event we are unable
or choose not to complete the purchase of the building, we would forfeit the
deposit but have no further liability to the seller or obligation to complete
the purchase. In September 2013, we deposited $11.1 million and provided an
$11.1 million standby letter of credit to meet the 10% deposit obligation.
Subsequent to the initial deposit, we made additional cash deposits in escrow
totaling $8.9 million. In connection with these additional cash deposits we have
reduced the standby letter of credit to $2.2 million. We plan to finance the
purchase of the building in 2014.
We are forecasting approximately $800 million in capital expenditures for fiscal
year 2014, up from $551 million in fiscal 2013. In addition to funding costs for
fixtures and leasehold improvements to open new Ross and dd's DISCOUNTS stores,
the upgrade or relocation of existing stores, investments in information
technology systems, and for various other expenditures related to our stores,
distribution centers, buying and corporate offices, this increase in capital
spending is primarily driven by the expected purchase of our New York buying
office and continued construction of our two new distribution centers. We expect
to fund the capital expenditures primarily with available cash and cash flows
from operations and with proceeds from our planned financing of the purchase of
our New York buying office.
We had no purchases of investments for the three month periods ended May 3, 2014
and May 4, 2013. We had proceeds from investments of $12.0 million and $0.1
million for the three month periods ended May 3, 2014 and May 4, 2013,
Net cash used in financing activities was $188.1 million and $175.7 million for
the three month periods ended May 3, 2014 and May 4, 2013, respectively. For the
three month periods ended May 3, 2014 and May 4, 2013, our liquidity and capital
requirements were provided by available cash and cash flows from operations.
In January 2013, our Board of Directors approved a two-year $1.1 billion stock
repurchase program for fiscal 2013 and 2014.
We repurchased 2.0 million and 2.3 million shares of common stock for aggregate
purchase prices of approximately $138.7 million and $138.3 million during the
three month periods ended May 3, 2014, and May 4, 2013, respectively. We also
acquired $0.5 million and $0.4 million shares of treasury stock from our
employee stock equity compensation programs, for aggregate purchase prices of
approximately $35.5 million and $25.8 million during the three month periods
ended May 3, 2014 and May 4, 2013, respectively.
--------------------------------------------------------------------------------For the three month periods ended May 3, 2014 and May 4, 2013, we paid dividends
of $42.6 million and $37.5 million, respectively.
Short-term trade credit represents a significant source of financing for
merchandise inventory. Trade credit arises from customary payment terms and
trade practices with our vendors. We regularly review the adequacy of credit
available to us from all sources and expect to be able to maintain adequate
trade, bank, and other credit lines to meet our capital and liquidity
requirements, including lease payment obligations in 2014.
Our existing $600 million unsecured revolving credit facility expires in June
2017 and contains a $300 million sublimit for issuance of standby letters of
credit. Interest on this facility is based on LIBOR plus an applicable margin
(currently 100 basis points) and is payable quarterly and upon maturity. As of
May 3, 2014 we had no borrowings or standby letters of credit outstanding on
this facility and our $600 million credit facility remains in place and
We estimate that existing cash balances, cash flows from operations, bank credit
lines, and trade credit are adequate to meet our operating cash needs and to
fund our planned capital investments, common stock repurchases, and quarterly
dividend payments for at least the next twelve months.
The table below presents our significant contractual obligations as of May 3,
Less than 1 - 3 3 - 5 After 5
($000) one year years years years Total¹
Senior notes $ - $ - $ 85,000 $ 65,000 $ 150,000
obligations 9,668 19,335 18,657 12,203 59,863
Operating leases (rent
obligations) 419,674 807,430 568,096 519,453 2,314,653
Purchase obligations 2,032,673 67,983 - - 2,100,656
obligations $ 2,462,015 $ 894,748 $ 671,753 $ 596,656 $ 4,625,172
1We have a $96.7 million liability for unrecognized tax benefits that is
included in Other long-term liabilities on our interim Condensed Consolidated
Balance Sheet. This liability is excluded from the schedule above as the timing
of payments cannot be reasonably estimated.
Senior notes. We have issued two series of unsecured senior notes in the
aggregate principal amount of $150 million, held by various institutional
investors. The Series A notes totaling $85 million are due in December 2018 and
bear interest at a rate of 6.38%. The Series B notes totaling $65 million are
due in December 2021 and bear interest at a rate of 6.53%. Interest on these
notes is included in Interest payment obligations in the table above. These
notes are subject to prepayment penalties for early payment of principal.
Borrowings under these notes are subject to certain operating and financial
covenants, including interest coverage and other financial ratios. As of May 3,
2014, we were in compliance with these covenants.
Off-Balance Sheet Arrangements
Operating leases. We currently lease our buying offices, three warehouse
facilities, our former corporate headquarters, all but three of our store
locations, and two truck and trailer parking facilities. Except for certain
leasehold improvements and equipment, these leased locations do not represent
long-term capital investments.
We lease three warehouses. Two of the warehouses are in Carlisle, Pennsylvania
with leases expiring in 2016 and 2017. The third warehouse is in Fort Mill,
South Carolina, with a lease expiring in 2016. The leases for all three
warehouses contain renewal provisions.
We lease a 10-acre parcel for trailer parking adjacent to our Perris, California
distribution center that expires in 2017 and a 20-acre facility located in
Moreno Valley, California primarily for ancillary truck and trailer parking that
expires in 2015. Both of these leases contain renewal provisions.
We lease approximately 192,000 square feet of office space for our former
corporate headquarters in Pleasanton, California, under several facility leases.
The term for the majority of these leases expires in June 2014. The lease term
for the remaining space of approximately 11,000 square feet expires in March
2015. We do not plan to renew any of these leases.
We currently lease approximately 411,000 and 52,000 square feet of office space
for our New York City and Los Angeles buying offices, respectively. The lease
terms for these facilities expire in 2022 and 2017, respectively, and contain
renewal provisions. We plan to purchase our New York buying office in 2014.
Purchase obligations. As of May 3, 2014 we had purchase obligations of
approximately $2,101 million. These purchase obligations primarily consist of
merchandise inventory purchase orders, commitments related to construction
projects, store fixtures and supplies, and information technology service and
Commercial Credit Facilities
The table below presents our significant available commercial credit facilities
at May 3, 2014:
Amount of Commitment Expiration Per Period
Less than 1 Total amount
($000) year 1 - 3 years 3 - 5 years After 5 years committed
Revolving credit facility $ - $ - $ 600,000 $ - $ 600,000
Total commercial commitments $ - $ - $ 600,000 $ - $ 600,000
For additional information relating to this credit facility, refer to Note E of
Notes to Condensed Consolidated Financial Statements.
Revolving credit facility. Our existing $600 million unsecured revolving credit
facility expires in June 2017 and contains a $300 million sublimit for issuance
of standby letters of credit. Interest on this facility is based on LIBOR plus
an applicable margin (currently 100 basis points) and is payable quarterly and
upon maturity. As of May 3, 2014 we had no borrowings outstanding or standby
letters of credit issued under this facility and were in compliance with the
Our revolving credit facility and senior notes have covenant restrictions
requiring us to maintain certain interest coverage and other financial ratios.
In addition, the interest rates under the revolving credit facility may vary
depending on actual interest coverage ratios achieved. As of May 3, 2014 we were
in compliance with these covenants.
Standby letters of credit and collateral trust. We use standby letters of credit
outside of our revolving credit facility in addition to a funded trust to
collateralize our insurance obligations. As of May 3, 2014 and May 4, 2013, we
had $24.3 million and $33.8 million, respectively, in standby letters of credit
outstanding and $54.2 million and $47.2 million, respectively, in a collateral
trust. The standby letters of credit are collateralized by restricted cash and
the collateral trust consists of restricted cash, cash equivalents, and
As of May 3, 2014, we also had a $2.2 million standby letter of credit in
connection with our New York buying office Sale-Purchase Agreement.
Trade letters of credit. We had $31.6 million and $41.7 million in trade letters
of credit outstanding at May 3, 2014 and May 4, 2013, respectively.
Dividends. In May 2014, our Board of Directors declared a cash dividend of $0.20
per common share, payable on June 30, 2014.
Effects of inflation or deflation. We do not consider the effects of inflation
or deflation to be material to our financial position and results of operations.
--------------------------------------------------------------------------------Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based on our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of our condensed consolidated
financial statements requires our management to make estimates and assumptions
that affect the reported amounts. These estimates and assumptions are evaluated
on an ongoing basis and are based on historical experience and on various other
factors that management believes to be reasonable. Actual results may differ
significantly from these estimates. During the first quarter of fiscal 2014,
there have been no significant changes to the policies discussed in our Annual
Report on Form 10-K for the year ended February 1, 2014.
This report may contain a number of forward-looking statements regarding,
without limitation, planned store growth, new markets, expected sales, projected
earnings levels, capital expenditures, and other matters. These forward-looking
statements reflect our then current beliefs, projections, and estimates with
respect to future events and our projected financial performance, operations,
and competitive position. The words "plan," "expect," "target," "anticipate,"
"estimate," "believe," "forecast," "projected," "guidance," "looking ahead" and
similar expressions identify forward-looking statements.
Future economic and industry trends that could potentially impact revenue,
profitability, and growth remain difficult to predict. As a result, our
forward-looking statements are subject to risks and uncertainties which could
cause our actual results to differ materially from those forward-looking
statements and our previous expectations and projections. Refer to Part II, Item
1A in this Quarterly Report on Form 10-Q for a more complete discussion of risk
factors for Ross and dd's DISCOUNTS. The factors underlying our forecasts are
dynamic and subject to change. As a result, any forecasts or forward-looking
statements speak only as of the date they are given and do not necessarily
reflect our outlook at any other point in time. We disclaim any obligation to
update or revise these forward-looking statements.
Other risk factors are detailed in our filings with the Securities and Exchange
Commission including, without limitation, our Annual Report on Form 10-K for
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