Ross Stores Inc. (NASDAQ:ROST)

The period between January 28, 2017, and January 29, 2022, demonstrates a fluctuating pattern in economic profit. Net operating profit after taxes (NOPAT) generally increased from 2017 to 2020, while invested capital consistently rose throughout the entire period. The cost of capital exhibited a slight, overall decreasing trend. However, economic profit itself experienced significant variation, peaking in 2020 before a substantial decline in 2021, followed by a recovery in 2022.

NOPAT Trend

Net operating profit after taxes increased from US$1,203,081 thousand in 2017 to US$1,766,422 thousand in 2020, representing substantial growth. A significant decrease was observed in 2021, with NOPAT falling to US$209,948 thousand, before rebounding to US$1,877,216 thousand in 2022. This suggests a period of operational disruption in 2021 followed by a recovery.

Cost of Capital Trend

The cost of capital began at 16.54% in 2017 and experienced minor fluctuations, reaching 16.82% in 2019. It then decreased to 16.33% in 2021 and further to 15.95% in 2022. This indicates a gradual reduction in the required rate of return for the company’s investments.

Invested Capital Trend

Invested capital consistently increased throughout the observed period, rising from US$6,022,627 thousand in 2017 to US$9,245,498 thousand in 2022. This demonstrates a continuous expansion of the company’s asset base and investment in operations.

Economic Profit Analysis

Economic profit showed a positive trend from 2017 to 2020, increasing from US$206,930 thousand to US$631,097 thousand. The substantial decrease to a negative US$1,222,373 thousand in 2021 indicates that the return on invested capital was less than the cost of capital during that year. The recovery to US$402,989 thousand in 2022 suggests improved performance relative to the cost of capital, but remains below the peak levels observed in prior years. The 2021 decline in economic profit appears to be driven by the significant drop in NOPAT, despite the continued increase in invested capital.

The interplay between NOPAT, cost of capital, and invested capital significantly influenced economic profit. While invested capital consistently grew, the fluctuations in NOPAT and the decreasing cost of capital created a dynamic pattern in economic profit, highlighting the importance of maintaining profitability relative to the cost of funding investments.

The financial data reveals the following trends over the six-year period:

Net Earnings

Net earnings generally increased from 2017 through 2020, rising from approximately 1,117,654 thousand US dollars to 1,660,928 thousand US dollars. However, in 2021 there was a significant decline to 85,382 thousand US dollars, which represents a substantial drop. In 2022, net earnings recovered strongly to 1,722,589 thousand US dollars, exceeding prior peak levels.

Net Operating Profit After Taxes (NOPAT)

NOPAT followed a similar upward trend initially, climbing steadily from 1,203,081 thousand US dollars in 2017 to 1,766,422 thousand US dollars in 2020. In 2021, there was a sharp decrease to 209,948 thousand US dollars, mirroring the decline seen in net earnings. In 2022, NOPAT rebounded to 1,877,216 thousand US dollars, representing the highest value recorded during the period.

The data reflects strong growth from 2017 to 2020 in both net earnings and NOPAT. The pronounced dip in 2021 could indicate an extraordinary circumstance or operational disruption impacting profitability. The swift recovery in 2022 suggests that the company regained operational efficiency and profitability following the 2021 downturn. Overall, despite the temporary contraction, the longer-term trend is one of increasing profitability.

The financial data reveals significant fluctuations in the provision for income taxes and cash operating taxes over the six-year period ending in early 2022. A detailed examination of the trends is as follows:

Provision for Income Taxes

Beginning with a value of approximately $668.5 million in early 2017, the provision for income taxes remains relatively stable through 2018 at around $678 million. However, it experiences a notable decline in 2019 to about $463.4 million and maintains a similar level in 2020 with approximately $503.4 million. A remarkable drop occurs in 2021, with the provision plummeting to roughly $20.9 million, before rebounding sharply in 2022 to approximately $535.9 million. This inconsistency suggests potential variations in taxable income, adjustments in tax strategy, or the impact of extraordinary items during the observed timeframe.

Cash Operating Taxes

Cash operating taxes start at approximately $727.9 million in early 2017 and increase moderately to about $761.2 million in 2018. Similar to the provision for income taxes, cash operating taxes show a marked decline in 2019, dropping to around $457.5 million, and a slight further decrease in 2020 to approximately $490.9 million. The value again dramatically decreases in 2021 to approximately $89.2 million, followed by a rise in 2022 to about $557.1 million. This pattern aligns with the trends seen in the provision for income taxes, indicating consistent fluctuations in actual tax payments, which could be influenced by changes in earnings, tax regulation modifications, or cash flow management strategies.

Overall, both tax-related items exhibit a pronounced dip in 2021 amid general declines during 2019 and 2020, followed by recovery in 2022. The significant reduction in 2021 for both metrics merits further investigation to understand the underlying causes, which might include one-time tax benefits, changes in corporate earnings, or legislative impacts.

Total Reported Debt & Leases

The total reported debt and leases showed a generally increasing trend from 2017 through 2019, rising from approximately $3.22 billion to $3.63 billion. In 2020, this leveled off slightly to around $3.49 billion before experiencing a significant surge in 2021 to $5.73 billion, followed by a slight decrease to $5.62 billion in 2022. This indicates a notable increase in leverage starting in 2021.

Stockholders’ Equity

Stockholders' equity increased steadily from $2.75 billion in 2017 to approximately $3.36 billion in 2020, reflecting consistent growth over these years. There was a slight decline in 2021 to $3.29 billion, which was followed by a substantial increase to $4.06 billion in 2022. Overall, equity growth has been positive with a dip in 2021, possibly influenced by broader financial adjustments during that period.

Invested Capital

Invested capital closely followed a growth pattern from 2017 to 2019, rising from $6.02 billion to about $6.88 billion, with a minor dip in 2020 to $6.81 billion. There was a sharp increase in 2021 to $8.77 billion and a further rise to $9.25 billion in 2022. This demonstrates an overall expansion in the capital base, particularly pronounced from 2021 onwards, aligning with the increased debt levels.

The economic spread ratio demonstrates a generally positive trend from 2017 to 2020, followed by a significant decline in 2021, and a partial recovery in 2022. This movement correlates with fluctuations in economic profit and invested capital over the same period.

Economic Spread Ratio Trend

The economic spread ratio increased steadily from 3.44% in 2017 to 9.27% in 2020, indicating an improving ability to generate returns exceeding the cost of capital. However, the ratio experienced a substantial decrease to -13.94% in 2021. A subsequent increase to 4.36% in 2022 suggests a partial rebound, though remaining below pre-2021 levels.

The observed fluctuations in the economic spread ratio are closely linked to the behavior of economic profit. The substantial negative value in 2021 for economic profit directly resulted in the negative economic spread ratio for that year. The recovery in 2022 is attributable to a positive economic profit figure.

Invested Capital and Economic Spread

Invested capital consistently increased throughout the period, from US$6,022,627 thousand in 2017 to US$9,245,498 thousand in 2022. Despite this growth in invested capital, the economic spread ratio was able to improve until 2020, suggesting efficient capital allocation during those years. The inability of increased economic profit in 2022 to fully offset the larger invested capital base resulted in a lower economic spread ratio compared to 2017-2020.

The significant drop in 2021 warrants further investigation to understand the underlying factors contributing to the negative economic profit. While the 2022 recovery is positive, the economic spread ratio remains below its peak values from 2019 and 2020, indicating that the company’s ability to generate returns above its cost of capital has not fully recovered.

The economic profit margin exhibited a generally positive trend from 2017 to 2020, followed by a significant decline in 2021 and a partial recovery in 2022. This movement correlates with fluctuations in economic profit and sales revenue over the same period.

Economic Profit Margin Trend

The economic profit margin increased from 1.61% in 2017 to 3.93% in 2020, indicating improving profitability relative to the cost of capital. This suggests the company was increasingly generating value for its investors during this timeframe. However, in 2021, the margin experienced a substantial decrease to -9.75%, signifying a significant destruction of economic value. A subsequent increase to 2.13% in 2022 indicates a partial recovery, but the margin remained below pre-2021 levels.

Relationship to Economic Profit

The economic profit margin’s trajectory closely mirrors that of economic profit. The consistent growth in economic profit from $206,930 thousand in 2017 to $631,097 thousand in 2020 directly contributed to the rising margin. The dramatic decline in economic profit to -$1,222,373 thousand in 2021 resulted in the negative margin. The return to positive economic profit of $402,989 thousand in 2022 drove the margin back into positive territory.

Relationship to Sales

Sales revenue generally increased from $12,866,757 thousand in 2017 to $18,916,244 thousand in 2022, with a notable exception in 2021 where sales decreased to $12,531,565 thousand. While increasing sales typically support higher economic profit, the 2021 experience demonstrates that revenue growth alone does not guarantee value creation. The significant drop in economic profit in 2021, despite a relatively high sales figure, suggests increased costs or a higher cost of capital eroded profitability.

The volatility observed in 2021 warrants further investigation to understand the underlying factors contributing to the substantial decline in economic profit and the resulting negative economic profit margin. The 2022 recovery, while positive, indicates that sustained improvement in economic value creation remains a key focus.