ROSS STORES, INC. 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 below under the caption "Forward-Looking Statements" and in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for 2018. 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 2018. All information is based on our fiscal calendar.
Overview
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 inthe United States with 1,550 locations in 39 states, theDistrict of Columbia andGuam as ofNovember 2, 2019 . Ross offers first-quality, in-season, name brand and designer apparel, accessories, footwear, and home fashions for the entire family at savings of 20% to 60% off department and specialty store regular prices every day. We also operate 260 dd's DISCOUNTS stores in 19 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 savings of 20% to 70% off moderate department and discount store regular prices every day.
Results of Operations
The following table summarizes the financial results for the three and nine
month periods ended
Three Months Ended Nine Months Ended
November 2, 2019 November 3, 2018 November 2, 2019 November 3, 2018
Sales
Sales (millions) $ 3,849 $ 3,550 $ 11,626 $ 10,876
Sales growth 8.4 % 6.6 % 6.9 % 8.0 %
Comparable store sales growth 5 % 3 % 3 % 3 %
Costs and expenses (as a percent of
sales)
Cost of goods sold 71.9 % 71.8 % 71.5 % 71.1 %
Selling, general and administrative 15.7 % 15.8 % 15.1 % 15.1 %
Interest income, net (0.1 %) (0.1 %) (0.1 %) (0.0 %)
Earnings before taxes (as a percent of
sales) 12.5 % 12.5 % 13.5 % 13.8 %
Net earnings (as a percent of sales) 9.6 % 9.5 % 10.4 % 10.5 %
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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 Nine Months Ended
Store Count November 2, 2019 November 3, 2018 November 2, 2019 November 3, 2018
Beginning of the period 1,772 1,680 1,717 1,622
Opened in the period 42 40 98 99
Closed in the period (4) 1 - (5) 1 (1)
End of the period 1,810 1,720 1,810 1,720
1 Includes a temporary closure of a store impacted by a weather event.
Sales. Sales for the three month period endedNovember 2, 2019 , increased$299 million , or 8.4%, compared to the three month period endedNovember 3, 2018 , due to the opening of 90 net new stores betweenNovember 3, 2018 andNovember 2, 2019 , and a 5% increase in "comparable" store sales (defined as stores that have been open for more than 14 complete months). Sales for the nine month period endedNovember 2, 2019 , increased$750 million , or 6.9%, compared to the nine month period endedNovember 3, 2018 , due to the opening of 90 net new stores betweenNovember 3, 2018 andNovember 2, 2019 , and a 3% increase in "comparable" store sales.
Our sales mix for the three and nine month periods ended
Three Months Ended Nine Months Ended
November 2, 2019 November 3, 2018 November 2, 2019 November 3, 2018
Ladies 26 % 27 % 27 % 28 %
Home Accents and Bed and Bath 24 % 25 % 24 % 24 %
Shoes 14 % 13 % 14 % 14 %
Men's 14 % 14 % 14 % 13 %
Accessories, Lingerie, Fine Jewelry, and
Fragrances 13 % 13 % 13 % 13 %
Children's 9 % 8 % 8 % 8 %
Total 100 % 100 % 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 our merchandise offerings. Although our
strategies and store expansion program contributed to sales gains for the three
and nine month periods ended November 2, 2019 , 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 and nine month periods
ended November 2, 2019 , increased $219 million and $575 million compared to the
same periods in the prior year, mainly due to increased sales from the opening
of 90 net new stores and a 5% and 3% increase in comparable store sales,
respectively.
Cost of goods sold as a percentage of sales for the three month period ended
November 2, 2019 , increased approximately 10 basis points from the same period
in the prior year, primarily due to a 45 basis point increase in distribution
expenses, partially offset by a 20 basis point improvement in merchandise
margin, a 10 basis point decrease in occupancy costs, and a five basis point
decrease in buying costs.
Cost of goods sold as a percentage of sales for the nine month period ended
November 2, 2019 , increased approximately 35 basis points from the same period
in the prior year, primarily due to a 30 basis point increase in distribution
expenses, a
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--------------------------------------------------------------------------------20 basis point increase in freight costs, and a five basis point increase in occupancy costs. These increases were partially offset by a 20 basis point improvement in merchandise margin.
We cannot be sure that the gross profit margins realized for the three and nine
month periods ended
Selling, general and administrative expenses. For the three and nine month periods endedNovember 2, 2019 , selling, general and administrative expenses ("SG&A") increased$43 million and$114 million compared to the same periods in the prior year, mainly due to increased store operating costs reflecting the opening of 90 net new stores betweenNovember 3, 2018 andNovember 2, 2019 . Selling, general and administrative expenses as a percentage of sales for the three month period endedNovember 2, 2019 , decreased approximately 10 basis points from the same period in the prior year primarily due to leverage on higher sales. Selling, general and administrative expenses as a percentage of sales for the nine month period endedNovember 2, 2019 , was unchanged from the same period in the prior year. Interest income, net. Interest income, net for the three and nine month periods endedNovember 2, 2019 , increased compared to the same periods in the prior year. The increase for the three month period endedNovember 2, 2019 was primarily due to lower interest expense on long-term debt due to the repayment of Series A 6.38% unsecured Senior Notes inDecember 2018 . The increase for the nine month period endedNovember 2, 2019 was primarily due to an increase in interest income due to higher interest rates, and lower interest expense on long-term debt due to the repayment of Series A 6.38% unsecured Senior Notes inDecember 2018 . Interest income, net for the three and nine month periods endedNovember 2, 2019 andNovember 3, 2018 , consists of the following: Three Months Ended Nine Months Ended November 3, ($000 ) November 2, 2019 November 3, 2018 November 2, 2019 2018 Interest expense on long-term debt $ 3,284 $ 4,646 $ 9,850$ 13,937 Other interest expense 216 233 756 768 Capitalized interest (1,186) (700) (3,069) (1,832) Interest income (6,716) (7,132) (22,356) (17,722) Interest income, net$ (4,402) $ (2,953) $ (14,819) $ (4,849) Taxes on earnings. Our effective tax rate for the three and nine month periods endedNovember 2, 2019 , was approximately 23%. Our effective tax rate for the three and nine month periods endedNovember 3, 2018 , was approximately 24%. The decreases in the effective tax rate for the three and nine month periods endedNovember 2, 2019 compared to the same periods in the prior year were primarily due to the resolution of tax positions with various tax authorities. The effective tax rate represents the applicable combined federal and state statutory rates reduced by the federal benefit of state taxes deductible on federal returns. The effective tax rate is impacted by changes in tax law and accounting guidance, location of new stores, level of earnings, tax effects associated with share-based compensation, and the resolution of tax positions with various tax authorities. Subsequent to the three month period endedNovember 2, 2019 , we resolved uncertain tax positions with a state tax authority. As a result, we expect to recognize a tax benefit of approximately$10.0 million in the Consolidated Statement of Earnings, and a decrease in unrecognized tax benefits of approximately$16.2 million , inclusive of$6.6 million of interest and penalties, in the three month period endingFebruary 1, 2020 . We anticipate that our effective tax rate for fiscal 2019 will be approximately 23%. Net earnings. Net earnings as a percentage of sales for the three month period endedNovember 2, 2019 , was higher compared to the same period in the prior year primarily due to lower taxes on earnings. Net earnings as a percentage of sales for the nine month period endedNovember 2, 2019 , was lower compared to the same period in the prior year primarily due to higher cost of goods sold, partially offset by lower taxes on earnings and higher net interest income as a percentage of sales. Earnings per share. Diluted earnings per share for the three and nine month periods endedNovember 2, 2019 were$1.03 and$3.32 , respectively, compared to$0.91 and$3.06 , respectively, for the three and nine month periods endedNovember 3, 2018 . The 13% and 8% increases in diluted earnings per share for the three and nine month periods endedNovember 2, 2019 , were attributable to 10% and 5% increases in net earnings, and 3% increases from the reduction in 22 --------------------------------------------------------------------------------
weighted average diluted shares outstanding, largely due to stock repurchases under our stock repurchase program for both the three and nine month periods.
Financial Condition
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, operating and variable lease
costs, 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 dividends, and we may use cash for the repayment
of debt as it becomes due.
Nine Months Ended
($000 ) November 2, 2019 November 3, 2018
Cash provided by operating activities $ 1,410,930 $ 1,450,072
Cash used in investing activities (400,734) (292,627)
Cash used in financing activities (1,284,748) (1,099,128)
Net (decrease) increase in cash, cash equivalents, and restricted cash and cash equivalents
$ (274,552) $ 58,317 Operating Activities
Net cash provided by operating activities was
The decrease in cash flow from operating activities for the nine month period endedNovember 2, 2019 , compared to the same period in the prior year was primarily driven by the timing of merchandise receipts and related payments associated with higher inventory versus last year, partially offset by higher net earnings. The timing of merchandise receipts and related payments versus last year resulted in accounts payable leverage (defined as accounts payable divided by merchandise inventory) of 68%, 67%, and 70% as ofNovember 2, 2019 ,February 2, 2019 , andNovember 3, 2018 , respectively. 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 maximize our ability to deliver bargains to our customers. Changes in packaway inventory levels impact our operating cash flow. As ofNovember 2, 2019 , packaway inventory was 39% of total inventory compared to 46% at the end of fiscal 2018. As ofNovember 3, 2018 , packaway inventory was 41% of total inventory compared to 49% at the end of fiscal 2017.
Investing Activities
Net cash used in investing activities was$400.7 million and$292.6 million for the nine month periods endedNovember 2, 2019 andNovember 3, 2018 , respectively. The increase in cash used for investing activities for the nine month period endedNovember 2, 2019 compared to the nine month period endedNovember 3, 2018 was due to an increase in our capital expenditures. 23 -------------------------------------------------------------------------------- Our capital expenditures were$401.3 million and$293.4 million for the nine month periods endedNovember 2, 2019 andNovember 3, 2018 , respectively. Our capital expenditures include costs to build, expand, and improve distribution centers; open new stores and improve existing stores; and for various other expenditures related to our information technology systems, buying and corporate offices. We are forecasting approximately$580 million in capital expenditures for fiscal year 2019 to fund initial investments in our next distribution center, 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. We expect to fund capital expenditures with available cash and cash equivalents, and cash flow from operations.
Financing Activities
Net cash used in financing activities was$1,284.7 million and$1,099.1 million for the nine month periods endedNovember 2, 2019 andNovember 3, 2018 , respectively. For the nine month periods endedNovember 2, 2019 andNovember 3, 2018 , our liquidity and capital requirements were provided by available cash and cash equivalents, and cash flows from operations. The increase in cash used for financing activities for the nine month period endedNovember 2, 2019 , compared to the nine month period endedNovember 3, 2018 , was primarily due to an increase in the repurchase of our common stock under our stock repurchase program and higher cash dividends. We repurchased 9.6 million and 9.4 million shares of common stock for aggregate purchase prices of approximately$965.9 millions and$806.5 million during the nine month periods endedNovember 2, 2019 andNovember 3, 2018 , respectively. We also acquired 0.6 million and 0.7 million shares of treasury stock under our employee stock equity compensation programs, for aggregate purchase prices of approximately$56.9 million and$53.7 million during the nine month periods endedNovember 2, 2019 andNovember 3, 2018 , respectively. InMarch 2019 , our Board of Directors approved a new, two-year$2.55 billion stock repurchase program through fiscal 2020.
For the nine month periods ended
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 credit, bank lines, and other credit sources to meet our capital and liquidity requirements, including lease payment obligations, in 2019.
InJuly 2019 , we entered into a new$800 million unsecured revolving credit facility, which replaced our previous$600 million unsecured revolving credit facility. This new credit facility expires inJuly 2024 , and contains a$300 million sublimit for issuance of standby letters of credit. The facility also contains an option allowing us to increase the size of our credit facility by up to an additional$300 million , with the agreement of the lenders. Interest on borrowings under this facility is based on LIBOR (or an alternate benchmark rate, if LIBOR is no longer available) plus an applicable margin (currently 75 basis points) and is payable quarterly and upon maturity. The revolving credit facility may be extended, at our option, for up to two additional one-year periods, subject to customary conditions. As ofNovember 2, 2019 , we had no borrowings or standby letters of credit outstanding under this facility and the$800 million credit facility remains in place and available.
The revolving credit facility is subject to a financial leverage ratio covenant.
As of
We estimate that existing cash and cash equivalent 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, repayment of
debt, common stock repurchases, and quarterly dividend payments for at least the
next 12 months.
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--------------------------------------------------------------------------------Contractual Obligations and Off-Balance Sheet Arrangements
The table below presents our significant contractual obligations as ofNovember 2, 2019 : Less than 1 - 3 3 - 5 After 5 ($000 ) one year years years years Total¹
Recorded contractual obligations:
Senior notes $ -$ 65,000 $ 250,000 $ -$ 315,000 Operating leases 598,139 1,150,682 803,555 704,245 3,256,621New York buying office ground lease2 5,883 13,059 14,178 949,299 982,419
Unrecorded contractual obligations:
Real estate obligations3 10,185 36,880 36,969 113,291 197,325 Interest payment obligations 12,682 23,242 16,875 - 52,799 Purchase obligations4 2,974,646 59,115 4,503 - 3,038,264
Total contractual obligations
1 We have a$82.3 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, except for the subsequent event item discussed in Note G.
² Our New York buying office building is subject to a 99-year ground lease.
3 Minimum lease payments for leases signed that have not yet commenced.
4 Purchase obligations primarily consist of merchandise inventory purchase orders, commitments related to construction projects, store fixtures and supplies, and information technology services, transportation, and maintenance contracts.
Other than the unrecorded contractual obligations noted above, we do not have
any material off-balance sheet arrangements as of
Senior notes. As ofNovember 2, 2019 , we had outstanding unsecured 3.375% Senior Notes dueSeptember 2024 with an aggregate principal amount of$250 million . Interest on the 2024 Notes is payable semi-annually. As ofNovember 2, 2019 , we also had outstanding Series B unsecured senior notes in the aggregate principal amount of$65 million , held by various institutional investors. The Series B notes are due inDecember 2021 and bear interest at 6.53%. Borrowings under these Senior Notes are subject to certain financial covenants, including interest coverage and other financial ratios. As ofNovember 2, 2019 , we were in compliance with these covenants.
The 2024 Notes, and Series B senior notes are subject to prepayment penalties for early payment of principal.
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 ofNovember 2, 2019 ,February 2, 2019 , andNovember 3, 2018 , we had$4.6 million ,$7.3 million , and$7.3 million , respectively, in standby letters of credit outstanding and$56.2 million ,$58.3 million and$57.9 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 investments. Trade letters of credit. We had$23.5 million ,$13.3 million , and$25.4 million in trade letters of credit outstanding atNovember 2, 2019 ,February 2, 2019 , andNovember 3, 2018 , respectively.
Dividends. In
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--------------------------------------------------------------------------------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 inthe 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. Other than changes to our lease accounting policies as a result of adoption of Accounting Standards Update ("ASU") No. 2016-02, Leases (Accounting Standards Codification "ASC" 842) described below, there have been no significant changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year endedFebruary 2, 2019 . As our leases generally do not provide an implicit discount rate, we use the estimated collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments for use in the calculation of the lease liabilities and right-of-use assets. This rate is determined using a portfolio approach based on the risk-adjusted rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar lease term. Operating lease liabilities and corresponding right-of-use assets include options to extend lease terms that are reasonably certain of being exercised. We do not record a lease liability and corresponding right-of-use asset for leases with terms of 12 months or less, and account for lease and non-lease components as a single lease component. Our lease portfolio is comprised of operating leases with the lease cost recorded on a straight-line basis over the lease term. Prior to the adoption of ASC 842, when a lease contained "rent holidays" or required fixed escalations of the minimum lease payments, we recorded rental expense on a straight-line basis over the term of the lease and the difference between the average rental amount was charged to expense and the amount payable under the lease was recorded as deferred rent. We began recording rent expense on the lease possession date. Tenant improvement allowances were amortized over the lease term. Changes in deferred rent and tenant improvement allowances were included as a component of operating activities in the Condensed Consolidated Statements of Cash Flows.
See Note A - Summary of Significant Accounting Policies (Recently Adopted Accounting Standards) and Note E - Leases in the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding our adoption of ASC 842.
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--------------------------------------------------------------------------------Forward-Looking Statements
This report may contain a number of forward-looking statements regarding 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," "outlook," "looking ahead" and similar expressions identify forward-looking statements. Future economic and industry trends that could potentially impact revenue, profitability, and growth are difficult to predict. 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. Such risks are not limited to but may include: •Competitive pressures in the apparel and home-related merchandise retailing industry, which are high. •Unexpected changes in the level of consumer spending on or preferences for apparel and home-related merchandise, which could adversely affect us. •Unseasonable weather that may affect shopping patterns and consumer demand for seasonal apparel and other merchandise. •Impacts from the macro-economic environment, financial and credit markets, and geopolitical conditions that affect consumer confidence and consumer disposable income. •Our need to effectively manage our inventories, markdowns, and inventory shortage in order to achieve our planned gross margins. •Our dependence on the market availability, quantity, and quality of attractive brand name merchandise at desirable discounts, and on the ability of our buyers to purchase merchandise to enable us to offer customers a wide assortment of merchandise at competitive prices. •Information or data security breaches, including cyber-attacks on our transaction processing and computer information systems, which could result in theft or unauthorized disclosure of customer, credit card, employee, or other private and valuable information that we handle in the ordinary course of our business. •Disruptions in our supply chain or in our information systems that could impact our ability to process sales and to deliver product to our stores in a timely and cost-effective manner. •Our need to obtain acceptable new store sites with favorable consumer demographics to achieve our planned growth. •Our need to expand in existing markets and enter new geographic markets in order to achieve growth. •Consumer problems or legal issues involving the quality, safety, or authenticity of products we sell, which could harm our reputation, result in lost sales, and/or increase our costs. •An adverse outcome in various legal, regulatory, or tax matters that could increase our costs. •Damage to our corporate reputation or brands that could adversely affect our sales and operating results. •Our need to continually attract, train, and retain associates with the retail talent necessary to execute our off-price retail strategies. •Our need to effectively advertise and market our business. •Risks associated with selling and importing merchandise produced in other countries. •Changes inU.S. tax, tariff, or trade policy regarding apparel and home-related merchandise produced in other countries, which could adversely affect our business. •Possible volatility in our revenues and earnings. •A natural or man-made disaster inCalifornia or in another region where we have a concentration of stores, offices, or a distribution center that could harm our business. •Our need to maintain sufficient liquidity to support our continuing operations, our new store and distribution center growth plans, and our stock repurchase program and quarterly dividends. 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. 27
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