10-Q 1 a2032739z10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 28, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number 0-14678 ROSS STORES, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-1390387 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8333 CENTRAL AVENUE, NEWARK, CALIFORNIA 94560-3433 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (510) 505-4400 Former name, former address and former fiscal year, if N/A changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of Common Stock, with $.01 par value, outstanding on November 25, 2000 was 81,011,317. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ROSS STORES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------ OCTOBER 28, January 29, OCTOBER 30, ($000) 2000 2000 1999 ------------------------------------------------------------------------------------------------------------------ ASSET (UNAUDITED) (Note A) (UNAUDITED) CURRENT ASSETS Cash and cash equivalents $ 34,758 $ 79,329 $ 31,645 Accounts receivable 18,748 15,689 15,884 Merchandise inventory 594,428 500,494 570,965 Prepaid expenses and other 19,576 17,682 16,591 ----------------------------------------------- Total Current Assets 667,510 613,194 635,085 PROPERTY AND EQUIPMENT Land and buildings 54,795 49,919 49,593 Fixtures and equipment 287,009 262,022 236,611 Leasehold improvements 172,382 161,571 150,481 Construction-in-progress 33,306 26,040 46,991 ----------------------------------------------- 547,492 499,552 483,676 Less accumulated depreciation and amortization 255,366 226,388 217,004 ----------------------------------------------- 292,126 273,164 266,672 Deferred income taxes and other assets 60,953 61,320 51,723 ----------------------------------------------- TOTAL ASSETS $ 1,020,589 $ 947,678 $ 953,480 ------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 287,955 $ 254,293 $ 263,121 Accrued expenses and other 89,062 102,178 97,755 Accrued payroll and benefits 50,001 48,283 46,176 Income taxes payable 7,879 17,716 20,579 Short-term debt 20,000 - 28,900 ----------------------------------------------- Total Current Liabilities 454,897 422,470 456,531 Long-term debt 80,000 - 24,000 Long-term liabilities 50,224 51,777 47,200 STOCKHOLDERS' EQUITY Common stock 811 888 887 Additional paid-in capital 225,888 234,635 220,641 Retained earnings 208,769 237,908 204,221 ----------------------------------------------- 435,468 473,431 425,749 ----------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,020,589 $ 947,678 $ 953,480 ------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements. 2 ROSS STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------------------------------------------------------------------------------------------------------------- OCTOBER 28, October 30, OCTOBER 28, October 30, ($000, except per share data, unaudited) 2000 1999 2000 1999 ---------------------------------------------------------------------------------------------------------------------------- SALES $ 639,469 $ 608,720 $ 1,929,932 $ 1,774,121 COSTS AND EXPENSES Cost of goods sold and occupancy 439,379 416,442 1,329,601 1,219,963 General, selling and administrative 138,449 125,833 390,541 349,702 Depreciation and amortization 11,279 9,459 32,529 27,911 Interest expense 1,531 147 2,371 167 ----------------------------- -------------------------------- 590,638 551,881 1,755,042 1,597,743 Earnings before taxes 48,831 56,839 174,890 176,378 Provision for taxes on earnings 19,093 22,224 68,382 68,964 ----------------------------- -------------------------------- Net earnings $ 29,738 $ 34,615 $ 106,508 $ 107,414 ---------------------------------------------------------------------------------------------------------------------------- Net earnings per share: Basic $ .36 $ .38 $ 1.28 $ 1.18 Diluted $ .36 $ .38 $ 1.27 $ 1.16 ---------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding: Basic 81,837 89,986 83,292 91,015 Diluted 82,389 91,138 84,025 92,444 ---------------------------------------------------------------------------------------------------------------------------- Stores open at end of period 411 381 411 381 ----------------------------------------------------------------------------------------------------------------------------
See notes to condensed consolidated financial statements. 3 ROSS STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED ----------------- OCTOBER 28, October 30, ($000, unaudited) 2000 1999 --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 106,508 $ 107,414 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 32,529 27,911 Other amortization 7,495 7,442 Change in assets and liabilities: Merchandise inventory (93,934) (104,505) Other current assets - net (4,954) (5,083) Accounts payable 36,990 18,023 Other current liabilities - net (12,779) 20,372 Other 2,164 2,206 ------------------------------- Net cash provided by operating activities 74,019 73,780 --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (63,501) (58,918) ------------------------------- Net cash used in investing activities (63,501) (58,918) --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowing under lines of credit 20,000 28,900 Proceeds of long-term debt 80,000 24,000 Issuance of common stock related to stock plans 4,027 9,536 Repurchase of common stock (149,741) (116,845) Dividends paid (9,375) (8,891) ------------------------------- Net cash used in financing activities (55,089) (63,300) ------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (44,571) (48,438) Cash and cash equivalents: Beginning of year 79,329 80,083 ------------------------------- End of quarter $ 34,758 $ 31,645 --------------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOW DISCLOSURES Interest paid $ 2,296 $ 374 Income taxes paid $ 78,239 $ 66,863 ---------------------------------------------------------------------------------------------------------
4 ROSS STORES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three and Nine Months Ended October 28, 2000 and October 30, 1999 (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared from the records of the Company without audit and, in the opinion of management, include all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at October 28, 2000 and October 30, 1999; the results of operations for the three and nine months ended October 28, 2000 and October 30, 1999; and changes in cash flows for the nine months ended October 28, 2000 and October 30, 1999. The balance sheet at January 29, 2000, presented herein, has been derived from the audited financial statements of the company for the fiscal year then ended. Accounting policies followed by the company are described in Note A to the audited consolidated financial statements for the fiscal year ended January 29, 2000. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted for purposes of the interim condensed consolidated financial statements. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including notes thereto, for the year ended January 29, 2000. The results of operations for the three-month and nine-month periods herein presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements at October 28, 2000 and October 30, 1999, and for the three-months and nine-months then ended have been reviewed, prior to filing, by the registrant's independent accountants whose report covering their review of the financial statements is included in this report on page 6. 2. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". SFAS 133, as amended by SFAS No. 138 issued in June 2000, defines derivatives, requires that all derivatives be carried at fair value, and provides for hedging accounting when certain conditions are met. Ross Stores, Inc. will adopt this statement in its first fiscal quarter of its fiscal year ending February 2, 2002. Management is completing its assessment of the implications of adopting this new standard, and does not anticipate any material impact to its financial results. 5 INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Stockholders of Ross Stores, Inc. Newark, California We have reviewed the accompanying condensed consolidated balance sheets of Ross Stores, Inc. (the "Company") as of October 28, 2000 and October 30, 1999, and the related condensed consolidated statements of earnings for the three-month and nine-month periods then ended and the condensed consolidated statements of cash flows for the nine-month periods then ended. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Ross Stores, Inc. as of January 29, 2000, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated March 10, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 29, 2000 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/Deloitte & Touche LLP San Francisco, CA November 17, 2000 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This section and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. The Company's 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 the subsection entitled "Forward-Looking Statements and Factors Affecting Future Performance" below. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and the consolidated financial statements in the Company's 1999 Form 10-K. All information is based on the Company's fiscal calendar. RESULTS OF OPERATIONS --------------------- PERCENTAGES OF SALES
----------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED ----------------------------------------------------------------------------------------------------------------------------- OCTOBER 28, October 30, OCTOBER 28, October 30, 2000 1999 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- SALES Sales ($000) $ 639,469 $ 608,720 $ 1,929,932 $ 1,774,121 Sales growth 5.1% 14.6% 8.8% 14.3% Comparable store sales increase (decrease) (2%) 7% 1% 7% Cost of goods sold and occupancy 68.7% 68.4% 68.9% 68.8% General, selling and administrative 21.7% 20.7% 20.2% 19.7% Depreciation and amortization 1.8% 1.6% 1.7% 1.6% Interest expense 0.2% 0.0% 0.1% 0.0% EARNINGS BEFORE TAXES 7.6% 9.3% 9.1% 9.9% PROVISION FOR TAXES ON EARNINGS 3.0% 3.7% 3.5% 3.9% NET EARNINGS 4.7% 5.7% 5.5% 6.1% -----------------------------------------------------------------------------------------------------------------------------
SALES The increase in sales for the three months ended October 28, 2000, compared to the same period in the prior year, reflects an increase in the number of stores open during the period, partially offset by a decrease in comparable store sales. The increase in sales for the nine months ended October 28, 2000, compared to the same period in the prior year, reflects an increase in the number of stores open during the period and an increase in comparable store sales. COSTS AND EXPENSES Cost of goods sold and occupancy expenses as a percentage of sales for the three and nine months ended October 28, 2000, increased compared to the same periods in the prior year, primarily due to reduced leverage on occupancy costs resulting from lower comparable store sales than in the prior periods. The increase in general, selling and administrative expenses as a percentage of sales for the three and nine months ended October 28, 2000, compared to the same periods in the prior year, primarily reflects higher store, benefit and distribution costs as a percentage of sales, partially 7 offset by leverage on advertising, and elimination of Year 2000 ("Y2K") related expense in fiscal 2000. Depreciation and amortization as a percentage of sales for the three and nine months ended October 28, 2000, compared to the same periods in the prior year, increased primarily due to reduced leverage on lower comparable store sales than in the prior periods. The increase in interest expense as a percentage of sales for the three and nine months ended October 28, 2000, compared to the same periods in the prior year, is due to higher average borrowings primarily to fund the increase in the Company's stock repurchase program and higher capital expenditures. NET EARNINGS The decrease in net earnings as a percentage of sales in the three and nine months ended October 28, 2000, compared to the same periods in the prior year, is primarily due to a decline in the rate of comparable store sales growth, increases in both the cost of goods sold and occupancy expenses ratio and the general, selling, and administrative expenses ratio. INCOME TAXES PAID The Company paid $78.2 million in income taxes in the nine months ended October 28, 2000, versus $66.9 million in the nine months ended October 30, 1999. The Company's effective tax rate in both periods was approximately 39%. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES ---------------------------------------------------- The primary uses of cash during the nine months ended October 28, 2000 were for (i) the repurchase of the Company's common stock; (ii) the purchase of inventory; and (iii) capital expenditures for new stores, improvements to existing stores, improvements in management information systems, and various expenditures to improve the central office and distribution centers. Total consolidated inventories increased 4% at October 28, 2000 from October 30, 1999, due mainly to an 8% increase in the number of stores open at the end of each period and a planned decrease in the level of in-store merchandise. The increase in accounts payable at October 28, 2000 from October 30, 1999 resulted mainly from the higher level of inventory purchases over the prior year. The decrease in income taxes payable at October 28, 2000 from October 30, 1999 resulted mainly from an increase in income taxes paid due to a reduction in inventory and fixed asset related timing differences. In January 2000, the Company announced a $300.0 million common stock repurchase program to be completed over the next two years. In the nine months ended October 28, 2000, the Company repurchased approximately 9.0 million shares for an aggregate purchase price of approximately $149.7 million. The Company has available under its principal bank credit agreement a $160.0 million revolving credit facility and a $30.0 million credit facility for the issuance of letters of credit, both of which expire in September 2002. Additionally, the company has uncommitted short-term bank lines of credit totaling $45.0 million. At October 28, 2000, the Company had $100.0 million outstanding under these credit agreements, of which $80.0 million is classified as long-term debt under the company's revolving credit facility. 8 The Company estimates that cash flow from operations, bank credit lines and trade credit are adequate to meet operating cash needs as well as to provide for the two-year stock repurchase program of up to $300.0 million in 2000 and 2001, dividend payments and planned capital additions during the upcoming year. FORWARD-LOOKING STATEMENTS AND FACTORS AFFECTING FUTURE PERFORMANCE ------------------------------------------------------------------- In this report and from time to time the Company may make forward-looking statements, which reflect the Company's current beliefs and estimates with respect to future events and the Company's future financial performance, operations and competitive strengths. The words "expect," "anticipate," "estimate," "believe", "looking ahead", "forecast", "plan" and similar expressions identify forward-looking statements. The Company's continued success depends, in part, upon its ability to increase sales at existing locations, to open new stores and to operate stores on a profitable basis. There can be no assurance that the Company's existing strategies and store expansion program will result in a continuation of revenue and profit growth. Future economic and industry trends that could potentially impact revenue and profitability remain difficult to predict. As a result, these forward-looking statements are subject to certain risks and uncertainties that could cause the Company's actual results to differ materially from historical results or current expectations. These factors include, without limitation, ongoing competitive pressures in the apparel industry, obtaining acceptable store locations, the Company's ability to continue to purchase attractive name-brand merchandise at desirable discounts, successful implementation of the Company's merchandise diversification strategy, the Company's ability to successfully extend its geographic reach, unseasonable weather trends, changes in the level of consumer spending on or preferences in apparel or home-related merchandise, the Company's ability to complete the two-year $300.0 million repurchase program in 2000 and 2001 at purchase prices that result in accretion to earnings per share in line with planned expectations, and greater than planned costs. In addition, the Company's corporate headquarters, one of its distribution centers and 41% of its stores are located in California. Therefore, a downturn in the California economy or a major natural disaster there could significantly affect the Company's operating results and financial condition. In addition to the above factors, the apparel industry is highly seasonal. The combined sales of the Company for the third and fourth (holiday) fiscal quarters are historically higher than the combined sales for the first two fiscal quarters. The Company has realized a significant portion of its profits in each fiscal year during the fourth quarter. If intensified price competition, lower than anticipated consumer demand or other factors, were to occur during the third and fourth quarters, and in particular during the fourth quarter, the Company's fiscal year results could be adversely affected. The factors underlying any forecasts or forward-looking statements 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 the Company's outlook at any other point in time. The Company does not undertake to update these forward-looking statements. 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Management believes that the market risk associated with the Company's ownership of market-risk sensitive financial instruments (including interest rate risk) as of October 28, 2000 is not material. ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Incorporated herein by reference to the list of Exhibits contained in the Exhibit Index that begins on page 12 of this Report. (b) Reports on Form 8-K None. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. ROSS STORES, INC. Registrant Date: December 11, 2000 /s/ John G. Call John G. Call, Senior Vice President, Chief Financial Officer, Corporate Secretary and Principal Accounting Officer 11 ------------------------------------------------------------------------------- INDEX TO EXHIBITS
Exhibit Number Exhibit ------ ------- 3.1 Corrected First Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Form 10-K filed by Ross Stores for its year ended January 30, 1999. 3.2 Amended By-laws, dated August 25, 1994, incorporated by reference to Exhibit 3.2 to the Form 10-Q filed by Ross Stores for its quarter ended July 30, 1994. 10.3 Employment Agreement effective August 14, 2000 between James C. Peters and Ross Stores, Inc. 10.4 Executive Relocation Loan Agreement between James C. Peters and Ross Stores, Inc. 10.5 Form of Employment Agreement between Ross Stores, Inc. and Senior Vice Presidents. 15 Letter re: Unaudited Interim Financial Information. 27 Financial Data Schedules (submitted for SEC use only).
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