10-Q 1 a2082452z10-q.htm 10-Q
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

	(Mark one)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 4, 2002

o	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 (State or other jurisdiction of incorporation or organization)		94-1390387 (I.R.S. Employer Identification No.)
8333 Central Avenue, Newark, California (Address of principal executive offices)		94560-3433 (Zip Code)
Registrant's telephone number, including area code		(510) 505-4400
Former name, former address and former fiscal year, if changed since last report.		N/A

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 ý No o

The number of shares of Common Stock, with $.01 par value, outstanding on May 31, 2002 was 78,617,275.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ROSS STORES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

			May 4, 2002		February 2, 2002		May 5, 2001
			($000)
			(Unaudited)		(Note A)		(Unaudited)
ASSETS
CURRENT ASSETS
	Cash and cash equivalents		$	72,630	$	40,351	$	38,282
	Accounts receivable			24,464		20,540		20,658
	Merchandise inventory			674,033		623,390		607,252
	Prepaid expenses and other			26,940		30,710		21,992

		Total Current Assets		798,067		714,991		688,184
PROPERTY AND EQUIPMENT
	Land and buildings			54,466		54,432		55,412
	Fixtures and equipment			357,879		351,288		312,879
	Leasehold improvements			211,856		209,086		193,949
	Construction-in-progress			38,825		24,109		21,001

				663,026		638,915		583,241
	Less accumulated depreciation and amortization			318,403		307,365		276,909

				344,623		331,550		306,332
Deferred income taxes and other long-term assets				38,984		36,184		40,110

TOTAL ASSETS			$	1,181,674	$	1,082,725	$	1,034,626

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
	Accounts payable		$	362,315	$	314,530	$	278,125
	Accrued expenses and other			106,282		92,760		81,474
	Accrued payroll and benefits			67,369		70,413		47,542
	Income taxes payable			30,568		11,885		21,577
	Short-term debt			0		0		40,800

		Total Current Liabilities		566,534		489,588		469,518
Long-term debt				0		0		50,000
Deferred income taxes and other long-term liabilities				51,321		48,682		41,371
STOCKHOLDERS' EQUITY
	Common stock			786		790		798
	Additional paid-in capital			300,244		289,734		236,969
	Retained earnings			262,789		253,931		235,970

		Total Stockholders' Equity		563,819		544,455		473,737

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY			$	1,181,674	$	1,082,725	$	1,034,626

See notes to condensed consolidated financial statements.

ROSS STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

		Three Months Ended
		May 4, 2002		May 5, 2001
		($000, except per share data, unaudited)
Sales		$	819,611	$	674,359
Costs and Expenses
	Cost of goods sold and occupancy		556,030		464,529
	General, selling and administrative		172,221		139,237
	Depreciation and amortization		12,861		11,999
	Interest expense		224		1,655

			741,336		617,420
Earnings before taxes			78,275		56,939
Provision for taxes on earnings			30,606		22,263

Net earnings		$	47,669	$	34,676

Net earnings per share:
	Basic	$	.60	$	.43
	Diluted	$	.59	$	.43

Weighted average shares outstanding:
	Basic		78,865		80,276
	Diluted		80,585		81,051

Stores open at end of period			470		419

See notes to condensed consolidated financial statements.

ROSS STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

			Three Months Ended
			May 4, 2002			May 5, 2001
			($000, unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings			$	47,669		$	34,676
Adjustments to reconcile net earnings to net cash provided by operating activities:
	Depreciation and amortization of property and equipment			12,861			11,999
	Other amortization			3,082			2,826
	Change in assets and liabilities:
		Merchandise inventory		(50,643	)		(47,687	)
		Other current assets—net		(154	)		(8,300	)
		Accounts payable		51,536			21,410
		Other current liabilities—net		33,211			13,676
		Other		(3,050	)		1,585

	Net cash provided by operating activities			94,512			30,185

CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment				(27,260	)		(21,322	)

	Net cash used in investing activities			(27,260	)		(21,322	)

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under lines of credit				0			6,800
Proceeds from long-term debt				0			20,000
Issuance of common stock related to stock plans				10,841			2,119
Repurchase of common stock				(42,075	)		(33,240	)
Dividends paid				(3,739	)		(3,414	)

	Net cash used in financing activities			(34,973	)		(7,735	)

NET INCREASE IN CASH AND CASH EQUIVALENTS				32,279			1,128
Cash and cash equivalents:
	Beginning of year			40,351			37,154

	End of quarter		$	72,630		$	38,282

See notes to condensed consolidated financial statements.

ROSS STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended May 4, 2002 and May 5, 2001
(Unaudited)

A. 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 May 4, 2002 and May 5, 2001; the results of operations for the three months ended May 4, 2002 and May 5, 2001; and changes in cash flows for the three months ended May 4, 2002 and May 5, 2001. The balance sheet at February 2, 2002, 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 February 2, 2002. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 February 2, 2002.

The results of operations for the three-month period herein presented are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated financial statements at May 4, 2002 and May 5, 2001, and for the three 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 7.

B. RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") SFAS No. 141, "Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets" (effective for the company on February 3, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and certain intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The adoption of the new standards did not have a material impact on the company's financial position or results of operations. As of February 2, 2002, goodwill was $2.9 million, and this amount will no longer be amortized. Amortization expense of goodwill during the three months ended May 5, 2001 was $31,000.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of Accounting Principals Board ("APB") Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS No. 144 became effective for the company on February 3, 2002. Adoption of this standard did not have a material effect on the company's financial position or results of operations.

C. EARNINGS PER SHARE (EPS)

SFAS No. 128, "Earnings Per Share," requires earnings per share to be computed and reported as both basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the sum of the weighted average number of common shares and dilutive common stock equivalents (stock awards and stock options) outstanding during the period. Dilutive EPS reflects the potential dilution that could occur if options to issue common stock were exercised into common stock. There were 195,011 shares at May 4, 2002 and 3,381,783 shares at May 5, 2001 that could potentially dilute basic EPS in the future that were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive (options exercise price exceeds average stock price) in the periods presented.

The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations (shares in thousands):

		Basic EPS		Effect of Dilutive Stock Options			Diluted EPS
May 4, 2002
	Shares		78,865		1,720			80,585
	Amount	$	.60	$	(.01	)	$	.59
May 5, 2001
	Shares		80,276		775			81,051
	Amount	$	.43	$	.00		$	.43

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. and subsidiaries (the "Company") as of May 4, 2002 and May 5, 2001, and the related condensed consolidated statements of earnings and cash flows for the three-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 February 2, 2002, 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 12, 2002, 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 February 2, 2002 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, California
May 21, 2002

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 2001 Form 10-K. All information is based on the company's fiscal calendar.

RESULTS OF OPERATIONS

PERCENTAGES OF SALES

		Three Months Ended
		May 4, 2002			May 5, 2001
SALES
	Sales ($000)	$	819,611		$	674,359
	Sales growth		21.5	%		6.5	%
	Comparable store sales increase (decrease)		10	%		(3	%)
	Cost of goods sold and occupancy		67.8	%		68.9	%
	General, selling and administrative		21.0	%		20.7	%
	Depreciation and amortization		1.6	%		1.8	%
	Interest expense		0.0	%		0.2	%
EARNINGS BEFORE TAXES			9.6	%		8.4	%
PROVISION FOR TAXES ON EARNINGS			3.7	%		3.3	%
NET EARNINGS			5.8	%		5.1	%

Stores. Total stores open as of May 4, 2002, and May 5, 2001 were 470 and 419, respectively.

	May 4, 2002		May 5, 2001
Stores at the beginning of the period	452		409
Stores opened in the period	20		11
Stores closed in the period	(2	)	(1	)

Stores at the end of the period	470		419

Sales. The 22% total sales increase for the three months ended May 4, 2002 over the prior year reflects a 10% gain in comparable store sales, the opening of 18 net new stores, and the three month impact of the stores opened in 2001. The 7% total sales increase for the three months ended May 5, 2001 over the prior year reflects the opening of 10 net new stores and the three months impact of the stores opened in 2000, partially offset by a 3% decrease in comparable store sales. The company anticipates that the competitive climate for apparel and off-price retailers will continue in 2002. Management expects to address that challenge by continuing to effectively execute and refine the company's existing strategies. Although these efforts along with the company's ongoing store expansion program contributed to sales and earnings gains for the three-month period ended May 4, 2002, there can be no assurance that these strategies will result in a continuation of revenue and profit growth.

Cost of Goods Sold and Occupancy. The decrease in the cost of goods sold and occupancy expense ratio for the three months ended May 4, 2002 compared to the same period in the prior year resulted mainly from lower markdowns as a percent of sales combined with leverage on occupancy costs realized from the increase in comparable store sales, partially offset by a lower initial mark-up. There can be no assurance that the gross profit margins realized for the three-month period ended May 4, 2002 will continue in the future.

General, Selling and Administrative Expense. The increase in general, selling and administrative expenses as a percentage of sales for the three months ended May 4, 2002, compared to the same period in the prior year, primarily were due to an increase in incentive plan costs, partially offset by leverage on other fixed and variable costs realized from the increase in comparable store sales.

Depreciation and Amortization. Depreciation and amortization expense as a percentage of sales for the three months ended May 4, 2002, compared to the same period in the prior year, decreased primarily due to leverage on higher sales.

Interest Expense. The decrease in interest expense as a percentage of sales for the three months ended May 4, 2002, compared to the same period in the prior year, is mainly due to lower average borrowings.

Taxes on Earnings. The company's effective tax rate for the three-month periods ended May 4, 2002 and May 5, 2001 was 39%, which represents the applicable federal and state statutory rates reduced by the federal benefit received for state taxes. During 2002, the company expects its effective tax rate to remain at approximately 39%.

Net Earnings. The increase in net earnings as a percentage of sales for the three months ended May 4, 2002, compared to the same period in the prior year, is primarily due to the improvement in gross margin and occupancy expense leverage realized from the increase in comparable store sales growth.

Stockholders Equity. In March 2002, the Board of Directors approved an increase in the number of shares of Common Stock authorized for issuance by the company from 170,000,000 to 300,000,000 shares.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

	Three Months Ended
	May 4, 2002			May 5, 2001
	($ in 000s)
Cash flows from Operating Activities	$	94,512		$	30,185
Cash flows from Investing Activities		(27,260	)		(21,322	)
Cash flows from Financing Activities		(34,973	)		(7,735	)

Net increase	$	32,279		$	1,128

For the three months ended May 4, 2002, the primary uses of cash, other than for operating expenditures, were for merchandise inventory, the repurchase in the open market of $42 million of the company's common stock, property and equipment to open 20 new stores and quarterly cash dividend payments. For the three months ended May 4, 2002, cash flows increased due to a higher accounts payable balance as a percent of inventory, an increase in accrued expenses, payroll and income taxes payable and increased issuances of common stock related to the company's stock plans. For the three months ended May 5, 2001, the primary uses of cash, other than for operating expenditures, were for merchandise inventory, the repurchase in the open market of $33 million of the company's common

stock, property and equipment to open 11 new stores and relocate one existing store and quarterly cash dividend payments. During the three month periods ended May 4, 2002 and May 5, 2001, the company spent approximately $27 million and $21 million, respectively, for capital expenditures, net of leased equipment, that included fixtures and leasehold improvements to open new stores and relocate existing stores; purchase previously leased equipment; update management information systems; and various other expenditures for existing stores and the central office.

Working capital was $232 million as of May 4, 2002, compared to $219 million as of May 5, 2001. As of May 4, 2002 and May 5, 2001, the company's current ratios were 1.4:1 and 1.5:1, respectively.

The company's primary source of liquidity is the sale of its merchandise inventory. Management regularly reviews the age and condition of the merchandise and is able to maintain current inventory in its stores through the replenishment processes and liquidation of non-current merchandise through clearance markdowns.

For the three months ended May 4, 2002, liquidity and capital requirements were provided by cash flows from operations, bank credit facilities and trade credit. The company's store sites, certain warehouses and buying offices are leased and, except for certain leasehold improvements and equipment, do not represent long-term capital investments. The company also leases a distribution center in South Carolina and plans to lease the land and building for a distribution center in Southern California currently under construction, under operating leases commonly referred to as synthetic leases. During the third quarter of 2003, the company expects the Southern California facility to become fully operational; at that time, the company plans to transfer its primary west coast distribution capabilities from its Newark, California distribution center to the new Southern California facility. The company owns its distribution center and corporate headquarters in Newark, California, and its distribution center in Carlisle, Pennsylvania. Short-term trade credit represents a significant source of financing for investments in merchandise inventory. Trade credit arises from customary payment terms and trade practices with the company's vendors. Management regularly reviews the adequacy of credit available to the company from all sources and has been able to maintain adequate lines to meet the capital and liquidity requirements of the company.

Dividends. At May 23, 2002, a quarterly cash dividend payment of $.0475 per common share was declared by the company's Board of Directors, payable on or about July 1, 2002. In May 2001, the Board of Directors declared quarterly cash dividends of $.0425 per common share.

Stock Repurchase Program. In February 2002, the company announced that the Board of Directors authorized a new stock repurchase program of up to $300.0 million over two years. During the three months ended May 4, 2002, the company repurchased approximately 1.1 million shares for an aggregate purchase price of approximately $42.1 million.

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 position. 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 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 a general deterioration in economic trends, ongoing competitive pressures in the apparel industry, obtaining acceptable store locations, the availability of dependable energy resources at reasonable costs, the company's ability to continue to purchase attractive name-brand merchandise at desirable discounts, the company's ability to successfully open its new distribution center in Southern California in a timely and cost effective manner, 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 execute the two-year $300.0 million repurchase program in 2002 at purchase prices that result in accretion to earnings per share in line with its plan and greater than planned costs. In addition, the company's corporate headquarters, one of its distribution centers and 37% 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The company is exposed to market risks, which primarily includes changes in interest rates. The company does not engage in financial transactions for trading or speculative purposes. Interest that is payable on the company's credit facilities is based on variable interest rates and is, therefore, affected by changes in market interest rates. In addition, lease payments under the company's synthetic lease agreements are determined based on variable interest rates and are, therefore, affected by changes in market interest rates. These lease payments will begin upon completion of construction of each new distribution center. As of May 4, 2002, the company did not have any long-term debt outstanding. The company does not currently use derivative financial instruments in its investment portfolio.

PART II—OTHER INFORMATION

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 14 of this Report.

(b): Reports on Form 8-K

None.

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: June 14, 2002		/s/J. Call John G. Call, Senior Vice President, Chief Financial Officer, Principal Accounting Officer and Corporate Secretary

INDEX TO EXHIBITS

Exhibit Number		Exhibit
3.1		Amendment of Certificate of Incorporation dated June 5, 2002 and Corrected First Restated Certificate of Incorporation.
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.
10.1		Consulting Agreement between Stuart G. Moldaw and Ross Stores, Inc. effective April 1, 2002.
15		Letter re: Unaudited Interim Financial Information.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ROSS STORES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
ROSS STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
ROSS STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
ROSS STORES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended May 4, 2002 and May 5, 2001 (Unaudited)
INDEPENDENT ACCOUNTANTS' REPORT

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II—OTHER INFORMATION

ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES
INDEX TO EXHIBITS