rossstores_10k.htm
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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549 |
FORM 10-K
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(Mark one) |
X |
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ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended January
30, 2010 |
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or |
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TRANSITION REPORT PURSUANT TO
SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from
_____ to _____
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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
incorporation or organization) |
(I.R.S. Employer Identification
No.) |
|
4440 Rosewood Drive, Pleasanton,
California |
94588-3050 |
(Address of principal executive
offices) |
(Zip Code) |
|
Registrant's telephone number,
including area code |
(925)
965-4400 |
Securities
registered pursuant to Section 12(b) of the Act:
Title of each
class |
|
Name of each
exchange on which registered |
Common stock, par value
$.01 |
|
Nasdaq Global Select
Market |
Securities registered pursuant to
Section 12(g) of the Act: |
Title of each
class |
None |
Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes X
No
Indicate by
check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes
No X
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
Indicate by
check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes No
Indicate by
check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. Large accelerated
filer X Accelerated filer Non-accelerated
filer Smaller
reporting company
Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Act).
Yes
No X
The aggregate
market value of the voting common stock held by non-affiliates of the Registrant
as of August 1, 2009 was $5,381,730,344, based on the closing price on that date
as reported by the NASDAQ Global Select Market®. Shares of voting
stock held by each director and executive officer have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.
The number of
shares of Common Stock, with $.01 par value, outstanding on March 12, 2010 was
122,529,865.
Documents incorporated by reference: |
|
Portions of the Proxy Statement for
Registrant's 2010 Annual Meeting of Stockholders, which will be filed on
or before June 1, 2010, are incorporated herein by reference into Part
III. |
|
|
|
|
2
PART I
Item 1. Business.
Ross Stores,
Inc. and its subsidiaries (“we” or the “Company”) operate two chains of
off-price retail apparel and home accessories stores. At
January 30, 2010, we operated a total of 1,005 stores, of which 953 were Ross
Dress for Less®
(“Ross”) locations in 27 states and Guam and 52 were dd’s DISCOUNTS® stores in four states.
Both chains target value-conscious women and men between the ages of 18 and 54.
Ross target customers are primarily from middle income households, while the
dd’s DISCOUNTS target customer is typically from more moderate income
households. The decisions we make, from merchandising, purchasing and pricing,
to the locations of our stores, are based on these customer
profiles.
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 percent off department and specialty store regular prices. dd’s DISCOUNTS
features 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 percent off moderate department and discount store
regular prices. We believe that both Ross and dd’s DISCOUNTS derive a
competitive advantage by offering a wide assortment of product within each of
our merchandise categories in organized and easy-to-shop store environments.
Our mission is
to offer competitive values to our target customers by focusing on the following
key strategic objectives:
We refer to our
fiscal years ended January 30, 2010, January 31, 2009, and February 2, 2008 as
fiscal 2009, fiscal 2008, and fiscal 2007, respectively.
Merchandising, Purchasing and
Pricing
We seek to
provide our customers with a wide assortment of first-quality, in-season,
brand-name and designer apparel, accessories, footwear, and home merchandise for
the entire family at everyday savings of 20 to 60 percent below department and
specialty store regular prices at Ross, and 20 to 70 percent below moderate
department and discount store regular prices at dd’s DISCOUNTS. We sell
recognizable brand-name merchandise that is current and fashionable in each
category. New merchandise typically is received from three to six times per week
at both Ross and dd’s DISCOUNTS stores. Our buyers review their merchandise
assortments on a weekly basis, enabling them to respond to selling trends and
purchasing opportunities in the market. Our merchandising strategy is reflected
in our advertising, which emphasizes a strong value message. Our stores offer a
treasure-hunt shopping experience where customers can find great savings every
day on a broad assortment of brand-name bargains for the family and the
home.
3
Merchandising. Our merchandising strategy incorporates
a combination of off-price buying techniques to purchase advance-of-season,
in-season, and past-season merchandise for both Ross and dd’s DISCOUNTS. We
believe nationally recognized name brands sold at compelling discounts will
continue to be an important determinant of our success. We generally leave the
brand-name label on the merchandise we sell.
We have
established merchandise assortments that we believe are attractive to our target
customers. Although we offer fewer classifications of merchandise than most
department stores, we generally offer a large selection of brand names within
each classification with a wide assortment of vendors, labels, prices, colors,
styles, and fabrics within each size or item. The mix of comparable store sales
by department in fiscal 2009 was approximately as follows: Ladies 30%, Home
Accents and Bed and Bath 24%, Men's 13%, Accessories, Lingerie, Fine Jewelry,
and Fragrances 13%, Shoes 11%, and Children’s 9%. Our merchandise offerings also
include product categories such as small furniture and furniture accents,
educational toys and games, luggage, gourmet food and cookware, watches,
sporting goods and, in select Ross stores, fine jewelry.
Purchasing. We have a combined network of
approximately 7,700 merchandise vendors and manufacturers for both Ross and dd’s
DISCOUNTS and believe we have adequate sources of first-quality merchandise to
meet our requirements. We purchase the vast majority of our merchandise directly
from manufacturers, and we have not experienced any difficulty in obtaining
sufficient merchandise inventory.
We believe that
our ability to effectively execute certain off-price buying strategies is a key
factor in our success. Our buyers use a number of methods that enable us to
offer our customers brand-name and designer merchandise at strong everyday
discounts relative to department and specialty stores for Ross and moderate
department and discount stores for dd’s DISCOUNTS. By purchasing later in the
merchandise buying cycle than department, specialty, and discount stores we are
able to take advantage of imbalances between retailers’ demand for products and
manufacturers’ supply of those products.
Unlike most
department and specialty stores, we typically do not require that manufacturers
provide promotional allowances, co-op advertising allowances, return privileges,
split shipments, drop shipments to stores, or delayed deliveries of merchandise.
For most orders, only one delivery is made to one of our four distribution
centers. These flexible requirements further enable our buyers to obtain
significant discounts on in-season purchases.
The majority of
the apparel and apparel-related merchandise that we offer in all of our stores
is acquired through opportunistic purchases created by manufacturer overruns and
canceled orders both during and at the end of a season. These buys are referred
to as "close-out" and "packaway" purchases. Close-outs can be shipped to stores
in-season, allowing us to get in-season goods into our stores at lower prices.
Packaway merchandise is purchased with the intent that it will be stored in our
warehouses until a later date, which may even be the beginning of the same
selling season in the following year. Packaway purchases are an effective method
of increasing the percentage of prestige and national brands at competitive
savings within our merchandise assortments. Packaway merchandise is mainly
fashion basics and, therefore, not usually affected by shifts in fashion
trends.
In fiscal 2009,
we continued our emphasis on this important sourcing strategy in response to
compelling opportunities available in the marketplace. Packaway accounted for
approximately 38% of total inventories as of January 30, 2010 and January 31,
2009. We believe the strong discounts we are able to offer on packaway
merchandise are one of the key drivers of our business results.
4
We continued to
roll out additional information system enhancements and process changes to
improve our merchandising capabilities. These new tools are designed to
strengthen our ability to plan, buy, and allocate at a more local versus
regional level. We completed the chain-wide rollout to all merchandise
categories for Ross in fiscal 2009, which was earlier than planned. The
long-term objective of these investments is to fine tune our merchandise
offerings to address more localized customer preferences and thereby gradually
increase sales productivity and gross profit margins in both newer and existing
regions and markets.
Our buying
offices are located in New York City and Los Angeles, the nation's two largest
apparel markets. These strategic locations allow our buyers to be in the market
on a daily basis, sourcing opportunities and negotiating purchases with vendors and
manufacturers. These locations also enable our buyers to strengthen vendor
relationships -- a key element to the success of our off-price buying
strategies.
Over the past
year, we continued to make strategic investments in our merchandise organization
to further enhance our ability to deliver name brand bargains to our customers.
At the end of fiscal 2009, we had a total of approximately 410 merchants for
Ross and dd’s DISCOUNTS combined, up from 360 in the prior year. The Ross and
dd’s buying organizations are separate and distinct. These buying resources
include merchandise management, buyers, and assistant buyers. Ross and dd’s
DISCOUNTS buyers have an average of about 12 years of experience, including
merchandising positions with other retailers such as Ann Taylor, Bloomingdale's,
Burlington Coat Factory, Foot Locker, HomeGoods, Kohl’s, Loehmann’s, Lord &
Taylor, Macy's, Marshalls, Nordstrom, Saks, and T.J. Maxx. We expect to continue
to make additional targeted investments in new merchants to further develop our
relationships with an expanding number of manufacturers and vendors. Our ongoing
objective is to strengthen our ability to procure the most desirable brands and
fashions at competitive discounts.
The off-price
buying strategies utilized by our experienced team of merchants enable us to
purchase Ross merchandise at net prices that are lower than prices paid by
department and specialty stores and to purchase dd’s DISCOUNTS merchandise at
net prices that are lower than prices paid by moderate department and discount
stores.
Pricing. Our policy is to sell brand-name
merchandise at Ross that is priced 20 to 60 percent below most department and
specialty store regular prices. At dd’s DISCOUNTS, we sell more moderate
brand-name product and fashions that are priced 20 to 70 percent below most
moderate department and discount store regular prices. Our pricing policy is
reflected on the price tag displaying our selling price as well as the
comparable selling price for that item in department and specialty stores for
Ross merchandise, or in more moderate department and discount stores for dd’s
DISCOUNTS merchandise.
Our pricing
strategy at Ross differs from that of a department or specialty store. We
purchase our merchandise at lower prices and mark it up less than a department
or specialty store. This strategy enables us to offer customers consistently low
prices. On a weekly basis our buyers review specified departments in our stores
for possible markdowns based on the rate of sale as well as at the end of
fashion seasons to promote faster turnover of merchandise inventory and to
accelerate the flow of fresh product. A similar pricing strategy is in place at
dd’s DISCOUNTS where prices are compared to those in moderate department and
discount stores.
Stores
At January 30,
2010, we operated a total of 1,005 stores
comprised of 953 Ross stores and 52 dd’s DISCOUNTS stores. Our stores are
conveniently located in predominantly community and neighborhood shopping
centers in heavily populated urban and suburban areas. Where the size of the
market permits, we cluster stores to benefit from economies of scale in
advertising, distribution, and field management.
5
We believe a key
element of our success is our organized, attractive, easy-to-shop, in-store
environments at both Ross and dd’s DISCOUNTS, which allow customers to shop at
their own pace. While our stores promote a self-service, treasure hunt shopping
experience, the layouts are designed to promote customer convenience in their
merchandise presentation, dressing rooms, checkout, and merchandise return
areas. Each store's sales area is based on a prototype single floor design with
a racetrack aisle layout. A customer can locate desired departments by signs
displayed just below the ceiling of each department. We enable our customers to
select among sizes and prices through prominent category and sizing markers,
promoting a self-service atmosphere. At most stores, shopping carts are
available at the entrance for customer convenience. All cash registers are
centrally located at store exits for customer ease and efficient
staffing.
We use
point-of-sale (“POS”) hardware and software systems in all stores, which
minimizes transaction time for the customer at the checkout counter by
electronically scanning each ticket at the point of sale and authorizing
personal checks and credit cards in a matter of seconds. In addition, the POS
systems allow us to accept debit cards and electronic gift cards from customers.
For Ross and dd’s DISCOUNTS combined, approximately 58% of payments in fiscal
2009 and fiscal 2008 were made with credit cards and debit cards. We provide
cash, credit card, and debit card refunds on all merchandise (not used, worn, or
altered) returned with a receipt within 30 days. Merchandise returns having a
receipt older than 30 days are exchanged or credited with store credit.
Operating Costs
Consistent with
the other aspects of our business strategy, we strive to keep operating costs as
low as possible. Among the factors which have enabled us to keep operating costs
low are:
- Labor costs that generally
are lower than full-price department and specialty stores due to a store
design that creates a self-service retail format and due to the utilization of
labor saving technologies.
-
Economies of
scale with respect to general and administrative costs as a result of
centralized merchandising, marketing, and purchasing
decisions.
-
Flexible store
layout criteria which facilitates conversion of existing buildings to our
formats.
Information Systems
We continue to
invest in new information systems and technology to provide a platform for
growth over the next several years. Recent initiatives include the following:
-
We completed
the rollout of demand forecasting software and related process changes
designed to strengthen our merchandise planning effectiveness for Ross. We
expect this initiative to drive gradual increases over time in store sales
productivity and profitability by improving our ability to plan, buy, and
allocate product at a more local level.
-
We implemented
additional supply chain enhancements to support expansion and improvement of
our supply chain network. We also implemented a new labor time and attendance
system at all of our distribution centers.
-
We completed
the rollout of new tools to better support the continued growth of our import
business. These new tools provide our merchants with greater visibility into
item cost components and inbound movement of import
products.
6
- We made enhancements to our
POS systems to reduce customer transaction and wait times.
- We implemented enhanced labor
scheduling capabilities to give our stores the ability to better align the
workforce with in-store activities.
- We upgraded our loss
prevention software to allow for greater in-depth analysis and reporting. We
also invested in additional store video surveillance systems to provide
centralized remote monitoring.
- We implemented new on-line
tools to assist our stores in their recruiting and hiring efforts. These new
tools are designed to help our store managers expedite the hiring process and
increase the quality of hiring decisions.
Distribution
We have four
distribution processing facilities–-two in California and one each in
Pennsylvania and South Carolina. We ship all of our merchandise to our stores
through these distribution centers, which are large, highly automated, and built
to suit our specific off-price business model.
In addition, we
own one and lease three other warehouse facilities for packaway storage. We use
other third-party facilities as needed for storage of packaway
inventory.
We also utilize
third-party cross docks to distribute merchandise to stores on a regional basis.
Shipments are made by contract carriers to the stores from three to six times
per week depending on location.
We believe that
our existing distribution centers with their current expansion capabilities will
provide adequate processing capacity to support store growth over the next few
years. Additional information on the size and locations of our distribution
centers and warehouse facilities is found under “Properties” in Item 2.
Advertising
We rely
primarily on television advertising to communicate the Ross value
proposition--brand-name merchandise at low everyday prices. This strategy
reflects our belief that television is the most efficient and cost-effective
medium for communicating everyday savings on a wide selection of brand-name
bargains for both the family and home. Advertising for dd’s DISCOUNTS is
primarily focused on new store grand openings and local grass roots initiatives.
Trademarks
The trademarks
for Ross Dress For Less® and dd’s
DISCOUNTS® have
been registered with the United States Patent and Trademark Office.
Employees
As of January
30, 2010, we had approximately 45,600 total employees, including an estimated
32,300 part-time employees. Additionally, we hire temporary
employees--especially during the peak seasons. Our employees are non-union.
Management considers the relationship between the Company and our employees to
be good.
7
Competition
We believe the
principal competitive factors in the off-price retail apparel and home
accessories industry are offering significant discounts on brand-name
merchandise, offering a well-balanced assortment that appeals to our target
customer, and consistently providing store environments that are convenient and
easy to shop. To execute this concept, we continue to make strategic investments
in our buying organization. As discussed under Information Systems, we also
recently completed the rollout in fiscal 2009 of additional enhancements to our
merchandise planning system to strengthen our ability to plan, buy, and allocate
product based on more local versus regional trends. We believe that we are well
positioned to compete on the basis of each of these factors.
Nevertheless, the
retail apparel market is highly fragmented and competitive. We face a
challenging macro- economic and retail environment that creates intense
competition for business from department stores, specialty stores, discount
stores, warehouse stores, other off-price retailers, and manufacturer-owned
outlet stores, many of which are units of large national or regional chains that
have substantially greater resources. We also compete to some degree with
retailers that sell apparel and home accessories through catalogs or over the
internet. The retail apparel and home-related businesses may become even more
competitive in the future.
dd’s DISCOUNTS
At January 30,
2010, we operated 52 dd’s DISCOUNTS in four states: 39 in California, 7 in
Texas, 5 in Florida, and 1 in Arizona. At January 31, 2009, we had 39 dd’s
DISCOUNTS stores in California, 6 in Florida, 5 in Texas, and 2 in Arizona, for
a total of 52 stores. This smaller off-price concept targets the needs of
households with more moderate incomes than Ross customers. We believe this is one of the fastest
growing demographic markets in the country. dd’s DISCOUNTS features a
moderately-priced assortment of first-quality, in-season, name brand apparel,
accessories, footwear, and home fashions at everyday savings of 20 to 70 percent
off moderate department and discount store regular prices.
The dd’s
DISCOUNTS business generally has similar merchandise departments and categories
to those of Ross, but features a different mix of brands at lower average price
points. The typical dd’s DISCOUNTS store is located in an established shopping
center in a densely populated urban or suburban neighborhood. The merchant,
store, and distribution organizations for dd’s DISCOUNTS and Ross are separate
and distinct; however, dd’s DISCOUNTS shares certain other corporate and support
services with Ross.
Available Information
The internet
address for our corporate website is www.rossstores.com. Our Annual Reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Proxy
Statements, and amendments to those reports are made available free of charge on
or through the Investors section of our corporate website promptly after being
electronically filed with the Securities and Exchange Commission. The
information found on our corporate website is not part of this, or any other
report or regulatory filing we file with or furnish to the Securities and
Exchange Commission.
8
Item 1A. Risk Factors.
Our Annual
Report on Form 10-K for fiscal 2009, and information we provide in our Annual
Report to Stockholders, press releases, telephonic reports, and other investor
communications, including those on our corporate website, may contain
forward-looking statements with respect to anticipated future events and our
projected financial performance, operations and competitive position that are
subject to risk factors that could cause our actual results to differ materially
from those forward-looking statements and our prior expectations and
projections. Refer to Management’s Discussion and Analysis for a more complete
identification and discussion of “Forward-Looking Statements.”
Our financial
condition, results of operations, cash flows, and the performance of our common
stock may be adversely affected by a number of risk factors. Risks and
uncertainties that apply to both Ross and dd’s DISCOUNTS include, without
limitation, the following:
We are subject to the economic and
industry risks that affect large retailers operating in the United States.
Our business is exposed to the risks of a large, multi-store retailer,
which must continually and efficiently obtain and distribute a supply of fresh
merchandise throughout a large and growing network of stores. These risk factors
include:
- An increase in the level of
competitive pressures in the apparel or home-related merchandise
industry.
- Changes in the level of
consumer spending on or preferences for apparel or home-related merchandise,
including the potential impact from the macro-economic environment,
uncertainty in financial and credit markets, and changes in geopolitical
conditions.
- Unseasonable weather trends
that could affect consumer demand for seasonal apparel and apparel-related
products.
- A change in the availability,
quantity, or quality of attractive brand-name merchandise at desirable
discounts that could impact our ability to purchase product and continue to
offer customers a wide assortment of merchandise at competitive
prices.
- Potential disruptions in the
supply chain that could impact our ability to deliver product to our stores in
a timely and cost-effective manner.
- A change in the availability,
quality, or cost of new store real estate locations.
- A downturn in the economy or
a natural disaster in California or in another region where we have a
concentration of stores or a distribution center. Our corporate headquarters,
Los Angeles buying office, two distribution centers, and 26% of our stores are
located in California.
We are subject to operating risks as we
attempt to execute on our merchandising and growth strategies.
The continued
success of our business depends, in part, upon our ability to increase sales at
our existing store locations, to open new stores, and to operate stores on a
profitable basis. Our existing strategies and store expansion programs may not
result in a continuation of our anticipated revenue or profit growth. In
executing our off-price retail strategies and working to improve efficiencies,
expand our store network, and reduce our costs, we face a number of operational
risks, including:
- Our ability to attract and
retain personnel with the retail talent necessary to execute our
strategies.
9
- Our ability to effectively
operate our various supply chain, core merchandising, and other information
systems.
- Our ability to improve our
merchandising capabilities through the recent implementation of new processes
and systems enhancements.
- Our ability to improve new
store sales and profitability, especially in newer regions and
markets.
- Our ability to achieve and
maintain targeted levels of productivity and efficiency in our distribution
centers.
- Our ability to lease or
acquire acceptable new store sites with favorable demographics and long term
financial returns.
- Our ability to identify and
to successfully enter new geographic markets.
- Our ability to achieve
planned gross margins by effectively managing inventories, markdowns, and
shrink.
- Our ability to effectively
manage all operating costs of the business, the largest of which are payroll
and benefit costs for store and distribution center employees.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
At January 30,
2010, we operated a total of 1,005 stores, of which 953 were Ross Dress for Less
locations in 27 states and Guam and 52 were dd’s DISCOUNTS® stores in four states. All stores are
leased, with the exception of two locations which we own.
During fiscal
2009, we opened 52 new Ross stores and closed three existing stores. The average
approximate Ross store size is 29,800 square feet.
During fiscal
2009, we opened four new dd’s DISCOUNTS stores and closed four existing stores.
The average approximate dd’s DISCOUNTS store size is 24,900 square feet. Our
dd’s DISCOUNTS stores are currently located in California, Texas, Florida, and
Arizona.
During fiscal
2009, no one store accounted for more than 1% of our sales.
We carry
earthquake insurance for business interruption, inventory, and personal property
to mitigate our risk on our corporate headquarters, distribution centers, buying
offices, and all of our stores.
Our real estate
strategy in 2010 is to open stores in states where we currently operate to
increase our market penetration and to reduce overhead and advertising expenses
as a percentage of sales in each market. We expect to enter new states for both
Ross and dd’s DISCOUNTS in 2011. Important considerations in evaluating a new
store location are the availability and quality of potential sites, demographic
characteristics, competition, and population density of the local trade area. In
addition, we continue to consider opportunistic real estate acquisitions.
10
The following
table summarizes the locations of our stores by state as of January 30, 2010 and
January 31, 2009.
State/Territory |
|
January 30, 2010 |
|
January 31,
2009 |
Alabama |
|
17 |
|
17 |
Arizona |
|
52 |
|
52 |
California |
|
259 |
|
247 |
Colorado |
|
28 |
|
27 |
Delaware |
|
1 |
|
1 |
Florida |
|
125 |
|
114 |
Georgia |
|
44 |
|
44 |
Guam |
|
1 |
|
1 |
Hawaii |
|
12 |
|
11 |
Idaho |
|
9 |
|
9 |
Louisiana |
|
11 |
|
10 |
Maryland |
|
18 |
|
17 |
Mississippi |
|
5 |
|
5 |
Montana |
|
6 |
|
6 |
Nevada |
|
20 |
|
19 |
New Jersey |
|
10 |
|
9 |
New Mexico |
|
6 |
|
5 |
North Carolina |
|
32 |
|
32 |
Oklahoma |
|
18 |
|
16 |
Oregon |
|
25 |
|
25 |
Pennsylvania |
|
32 |
|
29 |
South Carolina |
|
20 |
|
20 |
Tennessee |
|
25 |
|
24 |
Texas |
|
153 |
|
143 |
Utah |
|
12 |
|
12 |
Virginia |
|
32 |
|
30 |
Washington |
|
30 |
|
29 |
Wyoming |
|
2 |
|
2 |
Total |
|
1,005 |
|
956 |
Where possible,
we obtain sites in buildings requiring minimal alterations, allowing us to
establish stores in new locations in a relatively short period of time at
reasonable costs in a given market. At January 30, 2010, the majority of our
stores had unexpired original lease terms ranging from three to ten years with
three to four renewal options of five years each. The average unexpired original
lease term of our leased stores is five years, or 22 years if renewal options
are included. See Note E of Notes to Consolidated Financial Statements.
See additional
discussion under “Stores” in Item 1.
11
The following
table summarizes the location and approximate sizes of our distribution centers,
warehouses, and office locations as of January 30, 2010. Square footage
information for the distribution centers and warehouses represents total ground
floor area of the facility. Square footage information for office space
represents total space occupied. See additional discussion in Management’s
Discussion and Analysis.
|
|
|
|
|
Location |
|
Approximate Square
Footage |
|
Own /
Lease |
Distribution
centers |
|
|
|
|
Carlisle, Pennsylvania |
|
425,000 |
|
OWN |
Fort Mill, South Carolina |
|
1,300,000 |
|
OWN |
Moreno Valley, California |
|
1,300,000 |
|
OWN |
Perris, California |
|
1,300,000 |
|
LEASE |
|
Warehouses |
|
|
|
|
Carlisle, Pennsylvania |
|
239,000 |
|
LEASE |
Carlisle, Pennsylvania |
|
246,000 |
|
LEASE |
Fort Mill, South Carolina |
|
423,000 |
|
OWN |
Fort Mill, South Carolina |
|
255,000 |
|
LEASE |
|
Office
space |
|
|
|
|
Los Angeles, California |
|
26,000 |
|
LEASE |
New York City, New York |
|
197,000 |
|
LEASE |
Pleasanton, California |
|
181,000 |
|
LEASE |
|
|
|
|
|
In October 2008,
we purchased 167 acres of land in the Southeast.
See additional
discussion under “Distribution” in Item 1.
Item 3. Legal
Proceedings.
Like many
California retailers, we have been named in class action lawsuits regarding wage
and hour claims. Class action litigation involving allegations that hourly
associates have missed meal and/or rest break periods, as well as allegations of
unpaid overtime wages to store managers and assistant store managers at Company
stores under state law remains pending as of January 30, 2010.
We are also
party to various other legal proceedings arising in the normal course of
business. Actions filed against us include commercial, product, customer,
intellectual property, and labor and employment-related claims, including
lawsuits in which plaintiffs allege that we violated state or federal laws.
Actions against us are in various procedural stages. Many of these proceedings
raise factual and legal issues and are subject to uncertainties.
We believe that
the resolution of these legal proceedings will not have a material adverse
effect on our financial condition, results of operations, or cash
flows.
12
Item 4. (Removed and
Reserved).
Executive Officers of the Registrant
The following
sets forth the names and ages of our executive officers, indicating each
person's principal occupation or employment during at least the past five years.
The term of office is at the discretion of our Board of Directors.
Name |
|
Age |
|
Position |
Michael Balmuth |
|
59 |
|
Vice Chairman and Chief Executive
Officer |
James S. Fassio |
|
55 |
|
President and Chief Development Officer |
Michael O’Sullivan |
|
46 |
|
President and Chief Operating
Officer |
Barbara Rentler |
|
52 |
|
President and Chief Merchandising Officer |
Lisa Panattoni |
|
47 |
|
Group Executive Vice President,
Merchandising |
John G. Call |
|
51 |
|
Senior Vice President and Chief Financial
Officer |
Mr. Balmuth
joined the Board of Directors as Vice Chairman and became Chief Executive
Officer in September 1996. From February 2005 to December 2009, he also served
as President. He was Executive Vice President, Merchandising from July 1993 to
September 1996 and Senior Vice President and General Merchandise Manager from
November 1989 to July 1993. Before joining Ross, he was Senior Vice President
and General Merchandising Manager at Bon Marché in Seattle from September 1988
to November 1989. From April 1986 to September 1988, he served as Executive Vice
President and General Merchandising Manager for Karen Austin Petites.
Mr. Fassio
became President and Chief Development Officer in December 2009. Prior to this,
he was Executive Vice President, Property Development, Construction and Store
Design from February 2005 to December 2009. From March 1991 to February 2005, he
served as Senior Vice President, Property Development, Construction and Store
Design. He joined the Company in June 1988 as Vice President of Real Estate.
Prior to joining Ross, Mr. Fassio held various retail and real estate positions
with Safeway Stores, Inc.
Mr. O’Sullivan
became President and Chief Operating Officer in December 2009. From February
2005 to December 2009, he served as Executive Vice President and Chief
Administrative Officer, after joining Ross in September 2003 as Senior Vice
President, Strategic Planning and Marketing. From 1991 to 2003, Mr. O’Sullivan
was a partner with Bain & Company providing consulting advice to retail,
consumer goods, financial services and private equity clients.
Ms. Rentler has
served as President and Chief Merchandising Officer of Ross Dress for Less®
since December 2009, with responsibility for all merchandising categories at
Ross. From December 2006 to December 2009, she was Executive Vice President,
Merchandising, with responsibility for all Ross Apparel and Apparel-related
products. She also served as Executive Vice President and Chief Merchandising
Officer of dd’s DISCOUNTS® from February 2005 to December 2006, Senior Vice
President and Chief Merchandising Officer of dd's DISCOUNTS from January 2004 to
February 2005 and Senior Vice President and General Merchandise Manager at Ross
Dress for Less from February 2001 to January 2004. Prior to that, she held
various merchandising positions since joining the Company in February
1986.
Ms. Panattoni
was named Group Executive Vice President, Merchandising for Ross Home, Men’s and
Children’s in December 2009. She joined the Company in January 2005 as Senior
Vice President and General Merchandise Manager of Ross Home and was promoted to
Executive Vice President in October 2005. Prior to joining Ross, Ms. Panattoni
was with The TJX Companies, where she served as Senior Vice President of Merchandising and Marketing
for HomeGoods from 1998 to 2004 and as Divisional Merchandise Manager of the
Marmaxx Home Store from 1994 to 1998.
13
Mr. Call has
served as Senior Vice President and Chief Financial Officer since joining the
Company in June 1997. From June 1997 to February 2009 he also served as
Corporate Secretary. Mr. Call was Senior Vice President, Chief Financial
Officer, Secretary and Treasurer of Friedman’s from June 1993 until joining Ross
in 1997. Prior to joining Friedman’s, Mr. Call held various positions with Ernst
& Young LLP.
PART II
Item
5.
|
Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
|
General information. See the information set forth under the caption "Quarterly Financial Data
(Unaudited)" under Note K of Notes to Consolidated Financial Statements in Item
8 of this Annual Report, which is incorporated herein by reference. Our stock is
traded on The NASDAQ Global Select Market® under the symbol ROST. There were 768
stockholders of record as of March 12, 2010 and the closing stock price on that
date was $52.92 per share.
Cash dividends. In January 2010, our Board of Directors declared a quarterly cash
dividend payment of $.16 per common share, payable on March 31, 2010. Our Board
of Directors declared quarterly cash dividends of $.11 per common share in
January, May, August, and November 2009, and cash dividends of $.095 per common
share in January, May, August, and November 2008.
Issuer purchases of equity securities. Information regarding shares of common
stock we repurchased during the fourth quarter of fiscal 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of |
|
Maximum number |
|
|
|
|
Total |
|
|
|
|
|
shares (or units) |
|
(or approximate
dollar |
|
|
|
|
number of |
|
Average |
|
purchased as part |
|
value) of shares (or
units) |
|
|
|
|
shares |
|
price paid |
|
of publicly |
|
that may yet be
purchased |
|
|
|
|
(or units) |
|
per share |
|
announced plans or |
|
under the plans or |
|
|
Period |
|
purchased1 |
|
(or unit) |
|
programs |
|
programs ($000) |
|
|
November |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11/01/2009-11/28/2009) |
|
310,363 |
|
|
$ |
45.31 |
|
309,776 |
|
|
$ |
56,000 |
|
|
December |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11/29/2009-01/02/2010) |
|
724,912 |
|
|
$ |
43.68 |
|
722,670 |
|
|
$ |
25,000 |
|
|
January |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(01/03/2010-01/30/2010) |
|
553,919 |
|
|
$ |
45.27 |
|
542,397 |
|
|
$ |
- |
|
|
|
|
|
Total |
|
1,589,194 |
|
|
$ |
44.55 |
|
1,574,843 |
|
|
$ |
-² |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 We acquired 14,351
shares of treasury stock during the quarter ended January 30, 2010. Treasury
stock includes shares purchased from employees for tax withholding purposes
related to vesting of restricted stock grants. All remaining shares were
repurchased under our publicly announced stock repurchase program.
2 In January 2010 our
Board of Directors approved a two-year $750 million stock repurchase program for
fiscal 2010 and 2011.
See Note H of Notes to Consolidated
Financial Statements for equity compensation plan information. The information
under Item 12 of this Annual Report on Form 10-K under the caption “Equity
compensation plan information” is incorporated herein by reference.
14
Stockholder Return Performance Graph
The following
information in this Item 5 shall not be deemed filed for purposes of Section 18
of the Securities Act of 1934, nor shall it be deemed incorporated by reference
in any filing under the Securities Act of 1933.
Set forth below
is a line graph comparing the cumulative total stockholder returns for our
common stock with the Standard & Poors (“S&P”) 500 Index and the S&P
Retailing Group over the last five years. The five year period comparison graph
assumes that the value of the investment in our common stock at each fiscal year
end and the comparative indexes was $100 on January 31, 2005 and measures the
performance of this investment as of the last trading day in the month of
January for each of the following five years. These measurement dates are based
on the historical month-end data available and may vary slightly from our actual
fiscal year-end date for each period. Data with respect to returns for the
S&P indexes is not readily available for periods shorter than one month. The
total return assumes the reinvestment of dividends at the frequency with which
dividends are paid. The graph is a historical representation of past performance
only and is not necessarily indicative of future returns to stockholders.
COMPARISON OF 5 YEAR CUMULATIVE
TOTAL RETURN* Among Ross Stores, Inc., The
S&P 500 Index and S&P Retailing Group
|
|
|
*$100 invested on 1/28/05 in stock
or 1/31/05 in index, including reinvestment of dividends. Fiscal year
ended January 31. Indexes calculated on month-end
basis.
|
|
|
|
|
|
Base Period |
Indexed Returns for Years
Ended |
|
Company /
Index |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
Ross Stores, Inc. |
|
100 |
|
106 |
|
119 |
|
110 |
|
110 |
|
173 |
S&P 500 Index |
|
100 |
|
110 |
|
126 |
|
123 |
|
76 |
|
101 |
S&P Retailing Group |
|
100 |
|
109 |
|
124 |
|
106 |
|
67 |
|
107 |
15
Item 6. Selected Financial Data.
The following
selected financial data is derived from our consolidated financial statements.
The data set forth below should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” the
section “Forward-Looking Statements” in this Annual Report on Form 10–K and our
consolidated financial statements and notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000, except per
share data) |
|
2009 |
|
2008 |
|
2007 |
|
20061 |
|
2005 |
|
|
Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
7,184,213 |
|
$ |
6,486,139 |
|
|
$ |
5,975,212 |
|
|
$ |
5,570,210 |
|
|
$ |
4,944,179 |
|
|
|
Cost of goods sold |
|
|
5,327,278 |
|
|
4,956,576 |
|
|
|
4,618,220 |
|
|
|
4,317,527 |
|
|
|
3,852,591 |
|
|
|
Percent of
sales |
|
|
74.2% |
|
|
76.4% |
|
|
|
77.3% |
|
|
|
77.5% |
|
|
|
77.9% |
|
|
|
Selling, general and administrative |
|
|
1,130,813 |
|
|
1,034,357 |
|
|
|
935,901 |
|
|
|
863,033 |
|
|
|
766,144 |
|
|
|
Percent of
sales |
|
|
15.7% |
|
|
16.0% |
|
|
|
15.7% |
|
|
|
15.5% |
|
|
|
15.5% |
|
|
|
Interest expense (income), net |
|
|
7,593 |
|
|
(157 |
) |
|
|
(4,029 |
) |
|
|
(8,627 |
) |
|
|
(2,898 |
) |
|
|
Earnings before taxes |
|
|
718,529 |
|
|
495,363 |
|
|
|
425,120 |
|
|
|
398,277 |
|
|
|
328,342 |
|
|
|
Percent of
sales |
|
|
10.0% |
|
|
7.6% |
|
|
|
7.1% |
|
|
|
7.2% |
|
|
|
6.6% |
|
|
|
Provision for taxes on
earnings |
|
|
275,772 |
|
|
189,922 |
|
|
|
164,069 |
|
|
|
156,643 |
|
|
|
128,710 |
|
|
|
Net earnings |
|
|
442,757 |
|
|
305,441 |
|
|
|
261,051 |
|
|
|
241,634 |
|
|
|
199,632 |
|
|
|
Percent of
sales |
|
|
6.2% |
|
|
4.7% |
|
|
|
4.4% |
|
|
|
4.3% |
|
|
|
4.0% |
|
|
|
Basic earnings per share |
|
$ |
3.60 |
|
$ |
2.36 |
|
|
$ |
1.93 |
|
|
$ |
1.73 |
|
|
$ |
1.38 |
|
|
|
Diluted earnings per
share |
|
$ |
3.54 |
|
$ |
2.33 |
|
|
$ |
1.90 |
|
|
$ |
1.70 |
|
|
$ |
1.36 |
|
|
|
|
|
|
Cash
dividends declared per common share |
|
$ |
.490 |
|
$ |
.395 |
|
|
$ |
.320 |
|
|
$ |
.255 |
|
|
$ |
.220 |
|
|
|
|
1 Fiscal 2006 was
a 53-week year; all other fiscal years presented were 52
weeks.
|
|
|
16
Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000, except per
share data) |
2009 |
|
2008 |
|
2007 |
|
2006¹ |
|
2005 |
|
|
Financial Position |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise inventory |
$ |
872,498 |
|
$ |
881,058 |
|
$ |
1,025,295 |
|
$ |
1,051,729 |
|
$ |
938,091 |
|
|
Property and equipment, net |
|
942,999 |
|
|
951,656 |
|
|
868,315 |
|
|
748,233 |
|
|
639,852 |
|
|
Total assets |
|
2,768,633 |
|
|
2,355,511 |
|
|
2,371,322 |
|
|
2,358,591 |
|
|
1,938,738 |
|
|
Return on average assets |
|
17% |
|
|
13% |
|
|
11% |
|
|
11% |
|
|
11% |
|
|
Working capital |
|
554,933 |
|
|
358,456 |
|
|
387,396 |
|
|
431,699 |
|
|
349,864 |
|
|
Current ratio |
|
1.5:1 |
|
|
1.4:1 |
|
|
1.4:1 |
|
|
1.4:1 |
|
|
1.4:1 |
|
|
Long-term debt |
|
150,000 |
|
|
150,000 |
|
|
150,000 |
|
|
150,000 |
|
|
- |
|
|
Long-term debt as a percent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of total capitalization |
|
11% |
|
|
13% |
|
|
13% |
|
|
14% |
|
|
- |
|
|
Stockholders' equity |
|
1,157,293 |
|
|
996,369 |
|
|
970,649 |
|
|
909,830 |
|
|
836,172 |
|
|
Return on average stockholders' equity |
|
41% |
|
|
31% |
|
|
28% |
|
|
28% |
|
|
25% |
|
|
Book value per common
share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding at
year-end |
$ |
9.41 |
|
$ |
7.82 |
|
$ |
7.24 |
|
$ |
6.53 |
|
$ |
5.80 |
|
|
|
|
|
Operating
Statistics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores opened |
|
56 |
|
|
77 |
|
|
98 |
|
|
66 |
|
|
86 |
|
|
Number of stores closed |
|
7 |
|
|
11 |
|
|
5 |
|
|
3 |
|
|
1 |
|
|
Number of stores at
year-end |
|
1,005 |
|
|
956 |
|
|
890 |
|
|
797 |
|
|
734 |
|
|
Comparable store sales increase² |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52-week basis) |
|
6% |
|
|
2% |
|
|
1% |
|
|
4% |
|
|
6% |
|
|
Sales per square foot of
selling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
space3 (52-week basis) |
$ |
311 |
|
$ |
298 |
|
$ |
301 |
|
$ |
305 |
|
$ |
304 |
|
|
Square feet of selling space |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at year-end (000) |
|
23,700 |
|
|
22,500 |
|
|
21,100 |
|
|
18,600 |
|
|
17,300 |
|
|
Number of employees at
year-end |
|
45,600 |
|
|
40,000 |
|
|
39,100 |
|
|
35,800 |
|
|
33,200 |
|
|
Number of common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of record at year-end |
|
767 |
|
|
754 |
|
|
760 |
|
|
749 |
|
|
756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Fiscal 2006 was
a 53-week year; all other fiscal years presented were 52
weeks.
2 Comparable stores are stores open
for more than 14 complete months.
3 Based on average
annual selling square footage.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
Overview
We are the
second largest off-price apparel and home goods retailer in the United States.
At the end of fiscal 2009, we operated 953 Ross Dress for Less (“Ross”)
locations in 27 states and Guam, and 52 dd’s DISCOUNTS stores in four states.
Ross offers first-quality, in-season, name brand and designer apparel,
accessories, footwear and home fashions at everyday savings of 20 to 60 percent
off department and specialty store regular prices. dd’s DISCOUNTS features a
more moderately-priced assortment of first-quality, in-season, name brand
apparel, accessories, footwear and home fashions at everyday savings of 20 to 70
percent off moderate department and discount store regular prices.
Our primary
objective is to pursue and refine our existing off-price strategies to maintain
or improve profitability and improve financial returns over the long term. In
establishing appropriate growth targets for our business, we closely monitor
market share trends for the off-price industry. Total aggregate sales for five
of the largest off-price retailers in the United States increased 7% during 2009
on top of a 3% increase in 2008. This compares to total national apparel sales
which declined 5% during 2009 compared to a 3% decline in 2008, according to
data published by the NPD Group, Inc., which provides global sales and marketing
information on the retail industry.
We believe that
the stronger relative sales gains of the off-price retailers during 2009 were
driven mainly by the increased focus on value by consumers, whose spending
continued to be pressured by the challenging macro-economic environment. Our
sales and earnings gains in 2009 benefited from efficient execution of our
resilient and flexible off-price business model. Our merchandise and operational
strategies are designed to take advantage of the expanding market share of our
off-price industry as well as the ongoing customer demand for name brand
fashions for the family and home at compelling everyday discounts.
Looking ahead to
2010, we are planning to maintain tight controls of both inventory levels and
operating expenses as part of our strategy to help us maximize our
profitability.
We refer to our
fiscal years ended January 30, 2010, January 31, 2009, and February 2, 2008 as
fiscal 2009, fiscal 2008, and fiscal 2007, respectively. Fiscal 2009, 2008, and
2007 were 52 weeks.
18
Results of Operations
The following
table summarizes the financial results for fiscal years ended 2009, 2008, and
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
Sales (millions) |
|
$ |
7,184 |
|
$ |
6,486 |
|
$ |
5,975 |
|
|
|
Sales
growth |
|
|
10.8% |
|
|
8.6% |
|
|
7.3% |
|
|
|
Comparable store sales growth |
|
|
6% |
|
|
2% |
|
|
1% |
|
|
|
|
|
|
Costs and expenses (as a percent of
sales) |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
74.2% |
|
|
76.4% |
|
|
77.3% |
|
|
|
Selling,
general and administrative |
|
|
15.7% |
|
|
16.0% |
|
|
15.7% |
|
|
|
Interest expense (income), net |
|
|
0.1% |
|
|
0.0% |
|
|
(0.1% |
) |
|
|
|
|
|
Earnings before taxes (as a percent
of sales) |
|
|
10.0% |
|
|
7.6% |
|
|
7.1% |
|
|
|
|
|
|
Net earnings (as a percent of
sales) |
|
|
6.2% |
|
|
4.7% |
|
|
4.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores. Total stores open at the end of 2009,
2008, and 2007 were 1,005, 956, and 890, respectively. The number of stores at
the end of fiscal 2009, 2008, and 2007 increased by 5%, 7%, and 12% from the
respective prior years. 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.
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
|
Stores at the beginning of the
period |
|
956 |
|
|
890 |
|
|
797 |
|
|
|
Stores opened in the period |
|
56 |
|
|
77 |
|
|
98 |
|
|
|
Stores closed in the
period |
|
(7 |
) |
|
(11 |
) |
|
(5 |
) |
|
|
Stores at the end of the period |
|
1,005 |
|
|
956 |
|
|
890 |
|
|
|
|
|
|
Selling square footage at the end
of the period (000) |
|
23,700 |
|
|
22,500 |
|
|
21,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales. Sales for fiscal 2009 increased $698.1
million, or 10.8%, compared to the prior year due to the opening of 49 net new
stores during 2009, and a 6% increase in sales from “comparable” stores (defined
as stores that have been open for more than 14 complete months). Sales for
fiscal 2008 increased $510.9 million, or 8.6%, compared to the prior year due to
the opening of 66 net new stores during 2008, and a 2% increase in sales from
comparable stores.
19
Our sales mix is
shown below for fiscal 2009, 2008, and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
|
Ladies |
|
30% |
|
32% |
|
32% |
|
|
Home accents and bed and bath |
|
24% |
|
23% |
|
23% |
|
|
Men’s |
|
13% |
|
14% |
|
15% |
|
|
Accessories, lingerie, fine jewelry, and fragrances |
|
13% |
|
12% |
|
11% |
|
|
Shoes |
|
11% |
|
10% |
|
10% |
|
|
Children’s |
|
9% |
|
9% |
|
9% |
|
|
Total |
|
100% |
|
100% |
|
100% |
|
|
|
|
|
|
|
|
|
|
We expect 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, to
diversify our merchandise mix, and to more fully develop our organization and
systems to improve regional and local merchandise offerings. Although our
strategies and store expansion program contributed to sales gains in fiscal
2009, 2008, and 2007, we cannot be sure that they will result in a continuation
of sales growth or an increase in net earnings.
Cost of goods sold. Cost of goods sold in fiscal 2009 increased $370.7 million compared to
the prior year mainly due to increased sales from the opening of 49 net new
stores during the year, and a 6% increase in sales from comparable
stores.
Cost of goods sold as a percentage of
sales for fiscal 2009 decreased approximately 230 basis points from the prior
year. This improvement was mainly the result of a 170 basis point increase in
merchandise gross margin, which includes a 40 basis point benefit from lower
shortage. In addition, freight costs declined by about 50 basis points,
occupancy leveraged 35 basis points, and distribution costs declined by about 10
basis points. These improvements were partially offset by a 35 basis point
increase in buying expenses due in part to higher incentive costs versus the
prior year.
Cost of goods sold in fiscal 2008
increased $338.4 million compared to the prior year mainly due to increased
sales from the opening of 66 net new stores during the year, and a 2% increase
in sales from comparable stores.
Cost of goods sold as a percentage of
sales for fiscal 2008 decreased approximately 90 basis points from the prior
year. This improvement was mainly the result of a 100 basis point increase in
merchandise gross margin. In addition, distribution costs for the year improved
by about 20 basis points. As a percent of sales, these favorable trends were
partially offset by a 10 basis point increase in occupancy expense and a 20
basis point increase in incentive costs.
We cannot be sure that the gross profit
margins realized in fiscal 2009, 2008, and 2007 will continue in future years.
Selling, general and administrative expenses. For fiscal 2009, selling, general and
administrative expenses (“SG&A”) increased $96.5 million compared to the
prior year, mainly due to increased store operating costs reflecting the opening
of 49 net new stores during the year.
SG&A as a percentage of sales for
fiscal 2009 decreased by approximately 20 basis points compared to the prior
year. This decrease was mainly driven by 40 basis points of leverage on store
operating expenses partially offset by a 20 basis point increase in general and
administrative expenses due in part to higher incentive costs versus the prior
year.
For fiscal 2008, SG&A increased $98.5
million compared to the prior year, mainly due to increased store operating
costs reflecting the opening of 66 net new stores during the year.
20
SG&A as a
percentage of sales for fiscal 2008 grew by approximately 30 basis points over
the prior year. This increase was mainly driven by a 20 basis point increase in
store operating expenses and a 10 basis point increase in general and
administrative costs as a percent of sales.
The largest
component of SG&A is payroll. The total number of employees, including both
full and part-time, as of fiscal year end 2009, 2008, and 2007 was approximately
45,600, 40,000, and 39,100, respectively.
Interest expense (income), net.
In fiscal 2009,
interest expense increased by $1.1 million primarily due to lower capitalization
of construction interest. In fiscal 2009, interest income decreased by $6.7
million primarily due to lower investment yields as compared to the prior year.
As a percentage of sales, net interest expense in fiscal 2009 decreased pre-tax
earnings by approximately 10 basis points compared to the same period in the
prior year. The table below shows interest expense and income for fiscal 2009,
2008, and 2007:
|
($
millions) |
|
2009 |
|
2008 |
|
2007 |
|
|
Interest expense |
|
$ |
9.4 |
|
|
$ |
8.3 |
|
|
$ |
9.8 |
|
|
|
Interest income |
|
|
(1.8 |
) |
|
|
(8.5 |
) |
|
|
(13.8 |
) |
|
|
Total interest expense (income),
net |
|
$ |
7.6 |
|
|
$ |
(0.2 |
) |
|
$ |
(4.0 |
) |
|
|
|
Taxes on earnings. Our effective tax rate for fiscal 2009,
2008, and 2007 was approximately 38%, 38%, and 39%, respectively, 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 affected 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 2010 will be in the range of
38% to 39%.
Net earnings. Net earnings as a percentage of sales for
fiscal 2009 were higher compared to fiscal 2008 primarily due to both lower cost
of goods sold and lower SG&A expenses as a percentage of sales. Net earnings
as a percentage of sales for fiscal 2008 were higher compared to fiscal 2007
primarily due to lower cost of goods sold as a percentage of sales, partially
offset by higher SG&A expenses as a percentage of sales.
Earnings per share. Diluted earnings per share in fiscal 2009
was $3.54, compared to $2.33 in fiscal 2008. This 52% increase in diluted
earnings per share is attributable to an approximate 45% increase in net
earnings and a 5% reduction in weighted average diluted shares outstanding,
largely due to the repurchase of common stock under our stock repurchase
program. Diluted earnings per share in fiscal 2008 was $2.33, compared to $1.90
in fiscal 2007. This 23% increase in diluted earnings per share is attributable
to an approximate 17% increase in net earnings and a 4% reduction in weighted
average diluted shares outstanding, largely due to the repurchase of common
stock under our stock repurchase program.
21
Financial Condition
Liquidity and Capital Resources
Our primary
sources of funds for our business activities are cash flows from operations and
short-term trade credit. Our primary ongoing cash requirements are for
merchandise inventory purchases, payroll, capital expenditures in connection
with opening new stores, and investments in distribution centers and information
systems. We also use cash to repurchase stock under our stock repurchase program
and to pay dividends.
|
($ millions) |
|
2009 |
|
2008 |
|
2007 |
|
|
Cash flows provided by operating
activities |
|
$ |
888.4 |
|
|
$ |
583.4 |
|
|
$ |
353.5 |
|
|
|
Cash flows used in investing activities |
|
|
(136.8 |
) |
|
|
(218.7 |
) |
|
|
(244.7 |
) |
|
|
Cash flows used in financing
activities |
|
|
(304.6 |
) |
|
|
(300.9 |
) |
|
|
(218.6 |
) |
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
447.0 |
|
|
$ |
63.8 |
|
|
$ |
(109.8 |
) |
|
|
Operating Activities
Net cash
provided by operating activities was $888.4 million, $583.4 million, and $353.5
million in fiscal 2009, 2008, and 2007, respectively. The primary sources of
cash provided by operating activities in fiscal 2009, 2008, and 2007 were net
earnings plus non-cash expenses for depreciation and amortization. Accounts
payable leverage (defined as accounts payable divided by merchandise inventory)
was 75% as of January 30, 2010 and 61% as of January 31, 2009. The increase in
leverage was due to faster turns on lower inventory levels.
Our primary
source of liquidity 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.
Investing Activities
In fiscal 2009,
2008, and 2007, our capital expenditures were $158.5 million, $224.4 million,
and $236.1 million, respectively. Our capital expenditures included fixtures and
leasehold improvements to open new stores, implement information technology
systems, build or expand distribution centers, and various other expenditures
related to our stores, buying and corporate offices. In fiscal 2008 we also
purchased land in South Carolina with the intention of building a new
distribution center in the future. We opened 56, 77, and 98 new stores in fiscal
2009, 2008, and 2007, respectively, which included relocating one store in 2009
and one store in 2007.
We had purchases
of investments of $2.9 million, $37.0 million, and $146.1 million in fiscal
2009, 2008, and 2007, respectively. We had sales of investments of $24.5
million, $42.5 million, and $137.1 million in fiscal 2009, 2008, and 2007,
respectively.
22
We are
forecasting approximately $215 million in capital requirements in 2010 to fund
expenditures for fixtures and leasehold improvements to open both new Ross and
dd’s DISCOUNTS stores, for the relocation, or upgrade of existing stores, for
investments in store and merchandising systems, buildings, equipment and
systems, and for various buying and corporate office expenditures. We expect to
fund these expenditures with available cash, cash flows from operations, and
trade credit.
Our capital
expenditures over the last three years are set forth in the table below:
|
($ millions) |
|
2009 |
|
2008 |
|
2007 |
|
|
New stores |
|
$ |
55.4 |
|
$ |
52.0 |
|
$ |
110.1 |
|
|
Store renovations and improvements |
|
|
44.3 |
|
|
47.3 |
|
|
32.3 |
|
|
Information systems |
|
|
10.4 |
|
|
13.2 |
|
|
21.4 |
|
|
Distribution centers, corporate office, and other |
|
|
48.4 |
|
|
111.9 |
|
|
72.3 |
|
|
Total capital
expenditures |
|
$ |
158.5 |
|
$ |
224.4 |
|
$ |
236.1 |
|
|
|
|
Financing Activities
During fiscal
2009, 2008, and 2007, our liquidity and capital requirements were provided by
available cash, cash flows from operations, and trade credit. Our buying
offices, our corporate headquarters, one distribution center, one trailer
parking lot, three warehouse facilities, and all but two of our store locations
are leased and, except for certain leasehold improvements and equipment, do not
represent capital investments. We own one distribution center in each of the
following cities: Carlisle, Pennsylvania; Moreno Valley, California; and Fort
Mill, South Carolina; and one warehouse facility in Fort Mill, South
Carolina.
In January 2008,
our Board of Directors approved a two-year $600 million stock repurchase program
for fiscal 2008 and 2009. We repurchased 7.4 million and 9.3 million shares of
common stock for aggregate purchase prices of approximately $300 million in both
2009 and 2008. In January 2010, our Board of Directors approved a two-year $750
million stock repurchase program for fiscal 2010 and 2011.
In January 2010,
our Board of Directors declared a quarterly cash dividend payment of $.16 per
common share, payable on March 31, 2010. Our Board of Directors declared
quarterly cash dividends of $.11 per common share in January, May, August, and
November 2009, and cash dividends of $.095 per common share in January, May,
August, and November 2008.
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 2010.
We estimate that
cash flows from operations, bank credit lines, and trade credit are adequate to
meet operating cash needs, fund our planned capital investments, repurchase
common stock, and make quarterly dividend payments for at least the next twelve
months.
23
Contractual Obligations
The table below
presents our significant contractual obligations as of January 30, 2010:
|
|
|
Less than 1 |
|
|
|
|
|
After 5 |
|
|
|
|
($000) |
|
year |
|
1 - 3 years |
|
3 - 5 years |
|
years |
|
Total1 |
|
|
Senior Notes |
|
$ |
- |
|
$
|
- |
|
$ |
- |
|
$ |
150,000 |
|
$ |
150,000 |
|
|
Interest payment obligations |
|
|
9,667 |
|
|
19,335 |
|
|
19,335 |
|
|
50,195 |
|
|
98,532 |
|
|
Capital leases |
|
|
291 |
|
|
45 |
|
|
- |
|
|
- |
|
|
336 |
|
|
Operating leases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent
obligations |
|
|
333,077 |
|
|
660,350 |
|
|
502,136 |
|
|
500,278 |
|
|
1,995,841 |
|
|
Synthetic leases |
|
|
5,681 |
|
|
8,886 |
|
|
1,705 |
|
|
- |
|
|
16,272 |
|
|
Other
synthetic lease obligations |
|
|
1,564 |
|
|
1,030 |
|
|
56,000 |
|
|
- |
|
|
58,594 |
|
|
Purchase obligations |
|
|
1,078,071 |
|
|
7,886 |
|
|
831 |
|
|
- |
|
|
1,086,788 |
|
|
Total contractual
obligations |
|
$ |
1,428,351 |
|
$ |
697,532 |
|
$ |
580,007 |
|
$ |
700,473 |
|
$ |
3,406,363 |
|
|
|
|
1 We have a $33.6
million liability for unrecognized tax benefits that is included in other
long-term liabilities on our consolidated balance sheet. This liability is
excluded from the schedule above as the timing of payments cannot be reasonably
estimated.
Senior Notes. We have two series of unsecured senior
notes outstanding with various institutional investors for $150 million. 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
maintaining certain interest coverage and other financial ratios. As of January
30, 2010, we were in compliance with these covenants.
Capital leases. The obligations under capital leases
relate to distribution center equipment and have terms of two to three
years.
Off-Balance Sheet
Arrangements
Operating leases. We lease our two buying offices, our
corporate headquarters, one distribution center, one trailer parking lot, three
warehouse facilities, and all but two of our store locations. Except for certain
leasehold improvements and equipment, these leased locations do not represent
long-term capital investments.
We have lease
arrangements for certain equipment in our stores for our point-of-sale (“POS”)
hardware and software systems. These leases are accounted for as operating
leases for financial reporting purposes. The initial terms of these leases are
either two or three years, and we typically have options to renew the leases for
two to three one-year periods. Alternatively, we may purchase or return the
equipment at the end of the initial or each renewal term. We have guaranteed the
value of the equipment of $2.6 million, at the end of the respective initial
lease terms, which is included in Other synthetic lease obligations in the table
above.
24
We lease
approximately 181,000 square feet of office space for our corporate headquarters
in Pleasanton, California, under several facility leases. The terms for these
leases expire between 2011 and 2015 and contain renewal provisions.
We lease
approximately 197,000 and 26,000 square feet of office space for our New York
City and Los Angeles buying offices, respectively. The lease terms for these
facilities expire in 2021 and 2014, respectively and contain renewal
provisions.
We lease a 1.3
million square foot distribution center in Perris, California. The land and
building for this distribution center are financed under a $70 million ten-year
synthetic lease that expires in July 2013. Rent expense on this center is
payable monthly at a fixed annual rate of 5.8% on the lease balance of $70
million. At the end of the lease term, we have the option to either refinance
the $70 million synthetic lease facility, purchase the distribution center at
the amount of the then-outstanding lease obligation, or arrange a sale of the
distribution center to a third party. If the distribution center is sold to a
third party for less than $70 million, we have agreed under a residual value
guarantee to pay the lessor any shortfall amount up to $56 million. The
agreement includes a prepayment penalty for early payoff of the lease. Our
contractual obligation of $56 million is included in Other synthetic lease
obligations in the above table.
We have
recognized a liability and corresponding asset for the inception date estimated
fair value of the residual value guarantee in the amount of $8.3 million for the
Perris, California distribution center and $0.9 million for the POS leases.
These residual value guarantees are being amortized on a straight-line basis
over the original terms of the leases. The current portion of the related asset
and liability is recorded in prepaid expenses and accrued expenses,
respectively, and the long-term portion of the related assets and liabilities is
recorded in other long-term assets and other long-term liabilities,
respectively, in the accompanying consolidated balance sheets.
We lease two
warehouses in Carlisle, Pennsylvania with one lease expiring in 2013 and the
other expiring in 2014. In January 2009, we exercised a three-year option for a
255,000 square foot warehouse in Fort Mill, South Carolina, extending the term
to February 2013. In June 2008, we purchased a 423,000 square foot warehouse
also in Fort Mill, South Carolina. All four of these properties are used to
store our packaway inventory. We also lease a 10-acre parcel of land that has
been developed for trailer parking adjacent to our Perris distribution center.
The synthetic
lease facilities described above, as well as 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 January 30, 2010, we were in compliance with
these covenants.
Purchase obligations. As of January 30, 2010 we had purchase
obligations of $1,087 million. These purchase obligations primarily consist of
merchandise inventory purchase orders, commitments related to store fixtures and
supplies, and information technology service and maintenance contracts.
Merchandise inventory purchase orders of $1,044 million represent purchase
obligations of less than one year as of January 30, 2010.
25
Commercial Credit Facilities
The table below
presents our significant available commercial credit facilities at January 30,
2010:
|
|
|
Amount of Commitment Expiration Per
Period |
|
Total |
|
|
|
|
Less than |
|
1 - 3 |
|
3 – 5 |
|
After 5 |
|
amount |
|
|
($000) |
|
1 year |
|
years |
|
years |
|
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 D of Notes to
the Consolidated Financial Statements. |
|
Revolving credit facility.
We have available a
$600 million revolving credit facility with our banks, which contains a $300
million sublimit for issuance of standby letters of credit, of which $234.8
million was available at January 30, 2010. This credit facility which expires in
July 2011 has a LIBOR-based interest rate plus an applicable margin (currently
45 basis points) and is payable upon maturity but not less than quarterly. Our
borrowing ability under this credit facility is subject to our maintaining
certain financial ratios. As of January 30, 2010 we had no borrowings
outstanding under this facility and were in compliance with the covenants.
Standby letters of credit.
We use standby
letters of credit to collateralize certain obligations related to our
self-insured workers’ compensation and general liability claims. We had $65.2
million and $60.4 million in standby letters of credit outstanding at January
30, 2010 and January 31, 2009, respectively.
Trade letters of
credit. We had $32.9
million and $16.7 million in trade letters of credit outstanding at January 30,
2010 and January 31, 2009, respectively.
Other
2008 Equity Incentive Plan.
In May 2008, our
stockholders approved the adoption of the Ross Stores, Inc. 2008 Equity
Incentive Plan (the “2008 Plan”) with an initial share reserve of 8.3 million
shares of our common stock, of which 6.0 million shares can be issued as full
value awards. The 2008 Plan provides for various types of incentive awards,
which may potentially include the grant of stock options, stock appreciation
rights, restricted stock purchase rights, restricted stock bonuses, restricted
stock units, performance shares, performance units, and deferred compensation
awards.
Critical Accounting Policies
The preparation
of our 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. We believe the following critical accounting policies describe the
more significant judgments and estimates used in the preparation of our
consolidated financial statements.
26
Merchandise inventory. Our merchandise inventory is stated at
the lower of cost or market, with cost determined on a weighted average cost
basis. We purchase manufacturer overruns and canceled orders both during and at
the end of a season which are referred to as "packaway" inventory. Packaway
inventory is purchased with the intent that it will be stored in our warehouses
until a later date, which may even be the beginning of the same selling season
in the following year. Packaway inventory accounted for approximately 38% of
total inventories as of January 30, 2010 and January 31, 2009. Merchandise
inventory includes acquisition, processing, and storage costs related to
packaway inventory.
Included in the
carrying value of our merchandise inventory is a provision for shortage. The
shortage reserve is based on historical shortage rates as evaluated through our
periodic physical merchandise inventory counts and cycle counts. If actual
market conditions, markdowns, or shortage are less favorable than those
projected by us, or if sales of the merchandise inventory are more difficult
than anticipated, additional merchandise inventory write-downs may be required.
Long-lived assets. We record a long-lived asset impairment
charge when events or changes in circumstances indicate that the carrying amount
of a long-lived asset may not be recoverable based on estimated future cash
flows. An impairment loss would be recognized if analysis of the undiscounted
cash flow of an asset group was less than the carrying value of the asset
group. If our actual results differ materially
from projected results, an impairment charge may be required in the future. In
the course of performing our annual analysis, we determined that no long-lived
asset impairment charge was required for fiscal 2009, 2008, or
2007.
Depreciation and amortization
expense. Property and
equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation is calculated using the straight-line method over the estimated
useful life of the asset, typically ranging from five to twelve years for
equipment and 20 to 40 years for real property. The cost of leasehold
improvements is amortized over the lesser of the useful life of the asset or the
applicable lease term.
Lease accounting. When a lease contains “rent holidays” or
requires fixed escalations of the minimum lease payments, we record rental
expense on a straight-line basis over the term of the lease and the difference
between the average rental amount charged to expense and the amount payable
under the lease is recorded as deferred rent. We amortize deferred rent on a
straight-line basis over the lease term commencing on the possession date.
Tenant improvement allowances are included in other long-term liabilities and
are amortized over the lease term. Tenant improvement allowances are included as
a component of operating cash flows in the consolidated Statements of Cash
Flows.
Self-insurance. We self insure certain of our workers’
compensation and general liability risks as well as certain coverages under our
health plans. Our self-insurance liability is determined actuarially, based on
claims filed and an estimate of claims incurred but not reported. Should a
greater amount of claims occur compared to what is estimated or the costs of
medical care increase beyond what was anticipated, our recorded reserves may not
be sufficient and additional charges could be required.
Stock-based compensation.
We recognize
compensation expense based upon the grant date fair value of all stock-based
awards, typically over the vesting period. We use historical data to estimate
pre-vesting forfeitures and to recognize stock-based compensation expense. All
stock-based compensation awards are expensed over the service or performance
periods of the awards.
Income taxes. We account for our uncertain tax
positions in accordance with Accounting Standards Codification (“ASC”) 740. We
are required to make assumptions and judgments regarding our income tax
exposures. Our policy is to recognize interest and/or penalties related to all
tax positions in income tax expense. To the extent that accrued interest and
penalties do not ultimately become payable, amounts accrued will be reduced and
reflected as a reduction of the overall income tax provision in the period that
such determination is made.
27
The critical
accounting policies noted above are not intended to be a comprehensive list of
all of our accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by Generally Accepted Accounting
Principles (“GAAP”), with no need for management’s judgment in their
application. There are also areas in which management’s judgment in selecting
one alternative accounting principle over another would not produce a materially
different result. See our audited consolidated financial statements and notes
thereto under Item 8 in this Annual Report on Form 10-K, which contain
accounting policies and other disclosures required by GAAP.
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.
New Accounting
Pronouncements
In June 2009,
the Financial Accounting Standards Board (“FASB”) issued ASC 810 (originally
issued as SFAS No. 167, “Amendments to FASB Interpretation No. 46(R))”. Among
other things, ASC 810 responds to concerns about the application of certain key
provisions of FIN 46(R), including those regarding the transparency of the
involvement with variable interest entities. ASC 810 is effective for fiscal
years beginning after November 15, 2009. We do not believe the adoption of ASC
810 will have a material impact on our consolidated financial statements.
Forward-Looking Statements
Our Annual
Report on Form 10-K for fiscal 2009, and information we provide in our Annual
Report to Stockholders, press releases, telephonic reports, and other investor
communications including on our corporate website, 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 Item 1A in this Annual Report on Form
10-K 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 do not undertake to update or revise these forward-looking
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
We are exposed
to market risks, which primarily include changes in interest rates. We do not
engage in financial transactions for trading or speculative
purposes.
We occasionally
use forward contracts to hedge against fluctuations in foreign currency prices.
We had no outstanding forward contracts as of January 30, 2010.
28
Interest that is
payable on our revolving credit facility is based on variable interest rates and
is, therefore, affected by changes in market interest rates. As of January 30,
2010, we had no borrowings outstanding under our revolving credit facility. In
addition, lease payments under certain of our synthetic lease agreements are
determined based on variable interest rates and are, therefore, affected by
changes in market interest rates.
In addition, we
issued notes to institutional investors in two series: Series A for $85 million
accrues interest at 6.38% and Series B for $65 million accrues interest at
6.53%. The amount outstanding under these notes as of January 30, 2010 is $150
million.
Interest is
receivable on our short- and long-term investments. Changes in interest rates
may impact interest income recognized in the future, or the fair value of our
investment portfolio.
A hypothetical
100 basis point increase or decrease in prevailing market interest rates would
not have materially impacted our consolidated financial position, results of
operations, cash flows, or the fair values of our short- and long-term
investments as of and for the year ended January 30, 2010. We do not consider
the potential losses in future earnings and cash flows from reasonably possible,
near term changes in interest rates to be material.
29
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.
Consolidated Statements of Earnings
|
|
Year ended |
|
Year ended |
|
Year ended |
($000, except per
share data) |
|
January 30, 2010 |
|
January 31,
2009 |
|
February 2,
2008 |
Sales |
|
|
$ |
7,184,213 |
|
|
$ |
6,486,139 |
|
|
|
$ |
5,975,212 |
|
|
Costs and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of goods sold |
|
|
|
5,327,278 |
|
|
|
4,956,576 |
|
|
|
|
4,618,220 |
|
Selling,
general and administrative |
|
|
|
1,130,813 |
|
|
|
1,034,357 |
|
|
|
|
935,901 |
|
Interest expense (income), net |
|
|
|
7,593 |
|
|
|
(157 |
) |
|
|
|
(4,029 |
) |
Total costs
and expenses |
|
|
|
6,465,684 |
|
|
|
5,990,776 |
|
|
|
|
5,550,092 |
|
|
Earnings before taxes |
|
|
|
718,529 |
|
|
|
495,363 |
|
|
|
|
425,120 |
|
Provision for taxes on earnings |
|
|
|
275,772 |
|
|
|
189,922 |
|
|
|
|
164,069 |
|
Net
earnings |
|
|
$ |
442,757 |
|
|
$ |
305,441 |
|
|
|
$ |
261,051 |
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
$ |
3.60 |
|
|
$ |
2.36 |
|
|
|
$ |
1.93 |
|
Diluted |
|
|
$ |
3.54 |
|
|
$ |
2.33 |
|
|
|
$ |
1.90 |
|
|
|
Weighted average shares outstanding
(000) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
122,887 |
|
|
|
129,235 |
|
|
|
|
135,093 |
|
Diluted |
|
|
|
125,014 |
|
|
|
131,315 |
|
|
|
|
137,142 |
|
|
|
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per
share |
|
|
$ |
0.490 |
|
|
$ |
0.395 |
|
|
|
$ |
0.320 |
|
|
|
The accompanying
notes are an integral part of these consolidated financial
statements.
30
Consolidated Balance
Sheets
($000, except
share data) |
|
January 30, 2010 |
|
January 31,
2009 |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
768,343 |
|
|
$ |
321,355 |
|
Short-term investments |
|
|
1,754 |
|
|
|
798 |
|
Accounts receivable |
|
|
44,234 |
|
|
|
41,170 |
|
Merchandise inventory |
|
|
872,498 |
|
|
|
881,058 |
|
Prepaid expenses and other |
|
|
58,618 |
|
|
|
55,241 |
|
Deferred income taxes |
|
|
- |
|
|
|
14,093 |
|
Total
current assets |
|
|
1,745,447 |
|
|
|
1,313,715 |
|
|
Property and
Equipment |
|
|
|
|
|
|
|
|
Land and buildings |
|
|
239,688 |
|
|
|
201,385 |
|
Fixtures and equipment |
|
|
1,189,538 |
|
|
|
1,073,990 |
|
Leasehold improvements |
|
|
536,979 |
|
|
|
509,971 |
|
Construction-in-progress |
|
|
21,812 |
|
|
|
72,839 |
|
|
|
|
1,988,017 |
|
|
|
1,858,185 |
|
Less accumulated depreciation and
amortization |
|
|
1,045,018 |
|
|
|
906,529 |
|
Property and
equipment, net |
|
|
942,999 |
|
|
|
951,656 |
|
Long-term investments |
|
|
16,848 |
|
|
|
38,014 |
|
Other long-term assets |
|
|
63,339 |
|
|
|
52,126 |
|
Total assets |
|
$ |
2,768,633 |
|
|
$ |
2,355,511 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
658,299 |
|
|
$ |
536,745 |
|
Accrued expenses and other |
|
|
259,582 |
|
|
|
238,516 |
|
Accrued payroll and benefits |
|
|
218,234 |
|
|
|
170,878 |
|
Income taxes payable |
|
|
51,505 |
|
|
|
9,120 |
|
Deferred income taxes |
|
|
2,894 |
|
|
|
- |
|
Total
current liabilities |
|
|
1,190,514 |
|
|
|
955,259 |
|
Long-term debt |
|
|
150,000 |
|
|
|
150,000 |
|
Other long-term liabilities |
|
|
174,543 |
|
|
|
156,726 |
|
Deferred income taxes |
|
|
96,283 |
|
|
|
97,157 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity |
|
|
|
|
|
|
|
|
Common stock, par value $.01 per
share |
|
|
1,229 |
|
|
|
1,273 |
|
Authorized
600,000,000 shares |
|
|
|
|
|
|
|
|
Issued and
outstanding 122,929,000 and |
|
|
|
|
|
|
|
|
127,346,000
shares, respectively. |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
681,908 |
|
|
|
626,117 |
|
Treasury stock |
|
|
(36,864 |
) |
|
|
(30,819 |
) |
Accumulated other comprehensive income
(loss) |
|
|
170 |
|
|
|
(1,174 |
) |
Retained earnings |
|
|
510,850 |
|
|
|
400,972 |
|
Total stockholders’ equity |
|
|
1,157,293 |
|
|
|
996,369 |
|
Total liabilities and stockholders’ equity |
|
$ |
2,768,633 |
|
|
$ |
2,355,511 |
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these consolidated financial
statements.
31
Consolidated Statements of Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
other |
|
|
|
|
|
|
|
|
|
|
Common
stock |
|
paid-in |
|
Treasury |
|
comprehensive |
|
Retained |
|
|
|
|
(000) |
|
Shares |
|
Amount |
|
capital |
|
stock |
|
income
(loss) |
|
earnings |
|
Total |
Balance at February 3,
2007 |
|
139,356 |
|
|
$ |
1,402 |
|
|
$ |
545,702 |
|
|
$ |
(22,031 |
) |
|
|
$ |
(163 |
) |
|
$ |
384,920 |
|
|
$ |
909,830 |
|
Cumulative effect of adoption of new |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7,417 |
) |
|
|
(7,417 |
) |
accounting standard |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
261,051 |
|
|
|
261,051 |
|
Unrealized
investment gain |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,503 |
|
|
|
- |
|
|
|
1,503 |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
262,554 |
|
Common stock issued under
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plans, net
of shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used for
tax withholding |
|
1,612 |
|
|
|
8 |
|
|
|
20,745 |
|
|
|
(3,879 |
) |
|
|
- |
|
|
|
- |
|
|
|
16,874 |
|
Tax benefit from equity issuance |
|
- |
|
|
|
- |
|
|
|
6,535 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,535 |
|
Stock based compensation |
|
- |
|
|
|
- |
|
|
|
25,165 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,165 |
|
Common stock repurchased |
|
(6,872 |
) |
|
|
(69 |
) |
|
|
(20,360 |
) |
|
|
- |
|
|
|
- |
|
|
|
(179,571 |
) |
|
|
(200,000 |
) |
Dividends
declared |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(42,892 |
) |
|
|
(42,892 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 2,
2008 |
|
134,096 |
|
|
$ |
1,341 |
|
|
$ |
577,787 |
|
|
$ |
(25,910 |
) |
|
|
$ |
1,340 |
|
|
$ |
416,091 |
|
|
$ |
970,649 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
305,441 |
|
|
|
305,441 |
|
Unrealized investment loss |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,514 |
) |
|
|
- |
|
|
|
(2,514 |
) |
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
302,927 |
|
Common stock issued under stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plans, net of shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used for tax withholding |
|
2,598 |
|
|
|
25 |
|
|
|
47,848 |
|
|
|
(4,909 |
) |
|
|
- |
|
|
|
- |
|
|
|
42,964 |
|
Tax benefit from equity issuance |
|
- |
|
|
|
- |
|
|
|
8,532 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,532 |
|
Stock based compensation |
|
- |
|
|
|
- |
|
|
|
22,575 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22,575 |
|
Common stock repurchased |
|
(9,348 |
) |
|
|
(93 |
) |
|
|
(30,625 |
) |
|
|
- |
|
|
|
- |
|
|
|
(269,282 |
) |
|
|
(300,000 |
) |
Dividends
declared |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(51,278 |
) |
|
|
(51,278 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31,
2009 |
|
127,346 |
|
|
$ |
1,273 |
|
|
$ |
626,117 |
|
|
$ |
(30,819 |
) |
|
|
$ |
(1,174 |
) |
|
$ |
400,972 |
|
|
$ |
996,369 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
442,757 |
|
|
|
442,757 |
|
Unrealized investment gain |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,344 |
|
|
|
- |
|
|
|
1,344 |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
444,101 |
|
Common stock issued under stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
plans, net of shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used for tax withholding |
|
2,958 |
|
|
|
30 |
|
|
|
49,363 |
|
|
|
(6,045 |
) |
|
|
- |
|
|
|
- |
|
|
|
43,348 |
|
Tax benefit from equity issuance |
|
- |
|
|
|
- |
|
|
|
8,582 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,582 |
|
Stock based compensation |
|
- |
|
|
|
- |
|
|
|
25,746 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,746 |
|
Common stock repurchased |
|
(7,375 |
) |
|
|
(74 |
) |
|
|
(27,900 |
) |
|
|
- |
|
|
|
- |
|
|
|
(272,026 |
) |
|
|
(300,000 |
) |
Dividends
declared |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(60,853 |
) |
|
|
(60,853 |
) |
Balance at January 30,
2010 |
|
122,929 |
|
|
$ |
1,229 |
|
|
$ |
681,908 |
|
|
$ |
(36,864 |
) |
|
|
$ |
170 |
|
|
$ |
510,850 |
|
|
$ |
1,157,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
32
Consolidated Statements of Cash
Flows
|
|
Year ended |
|
Year ended |
|
Year ended |
($000) |
|
January 30, 2010 |
|
January 31,
2009 |
|
February 2,
2008 |
Cash Flows From Operating
Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
$ |
442,757 |
|
|
|
$ |
305,441 |
|
|
|
$ |
261,051 |
|
Adjustments to reconcile net
earnings to net cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
159,043 |
|
|
|
|
141,802 |
|
|
|
|
122,801 |
|
Stock-based
compensation |
|
|
|
25,746 |
|
|
|
|
22,575 |
|
|
|
|
25,165 |
|
Deferred income taxes |
|
|
|
16,113 |
|
|
|
|
23,804 |
|
|
|
|
(10,699 |
) |
Tax
benefit from equity issuance |
|
|
|
8,582 |
|
|
|
|
8,532 |
|
|
|
|
6,535 |
|
Excess tax benefit from stock-based
compensation |
|
|
|
(7,291 |
) |
|
|
|
(5,973 |
) |
|
|
|
(5,140 |
) |
Change in
assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise
inventory |
|
|
|
8,560 |
|
|
|
|
144,237 |
|
|
|
|
26,434 |
|
Other
current assets |
|
|
|
(6,441 |
) |
|
|
|
(6,089 |
) |
|
|
|
(15,039 |
) |
Accounts
payable |
|
|
|
115,893 |
|
|
|
|
(101,682 |
) |
|
|
|
(63,199 |
) |
Other
current liabilities |
|
|
|
118,980 |
|
|
|
|
43,249 |
|
|
|
|
(18,716 |
) |
Other
long-term, net |
|
|
|
6,442 |
|
|
|
|
7,543 |
|
|
|
|
24,366 |
|
Net cash
provided by operating activities |
|
|
|
888,384 |
|
|
|
|
583,439 |
|
|
|
|
353,559 |
|
|
Cash Flows From Investing
Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
|
(158,487 |
) |
|
|
|
(224,418 |
) |
|
|
|
(236,121 |
) |
Proceeds from sales of property and
equipment |
|
|
|
10 |
|
|
|
|
117 |
|
|
|
|
356 |
|
Purchases of investments |
|
|
|
(2,904 |
) |
|
|
|
(36,984 |
) |
|
|
|
(146,082 |
) |
Proceeds from investments |
|
|
|
24,548 |
|
|
|
|
42,522 |
|
|
|
|
137,104 |
|
Net cash
used in investing activities |
|
|
|
(136,833 |
) |
|
|
|
(218,763 |
) |
|
|
|
(244,743 |
) |
|
Cash Flows From Financing
Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefit from stock-based compensation |
|
|
|
7,291 |
|
|
|
|
5,973 |
|
|
|
|
5,140 |
|
Issuance of common stock related to
stock plans |
|
|
|
49,393 |
|
|
|
|
47,873 |
|
|
|
|
20,753 |
|
Treasury stock purchased |
|
|
|
(6,045 |
) |
|
|
|
(4,909 |
) |
|
|
|
(3,879 |
) |
Repurchase of common
stock |
|
|
|
(300,000 |
) |
|
|
|
(300,000 |
) |
|
|
|
(200,000 |
) |
Dividends paid |
|
|
|
(55,202 |
) |
|
|
|
(49,838 |
) |
|
|
|
(40,638 |
) |
Net cash
used in financing activities |
|
|
|
(304,563 |
) |
|
|
|
(300,901 |
) |
|
|
|
(218,624 |
) |
|
Net increase (decrease) in cash and
cash equivalents |
|
|
|
446,988 |
|
|
|
|
63,775 |
|
|
|
|
(109,808 |
) |
|
Cash and cash
equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of
year |
|
|
|
321,355 |
|
|
|
|
257,580 |
|
|
|
|
367,388 |
|
End of
year |
|
|
$ |
768,343 |
|
|
|
$ |
321,355 |
|
|
|
$ |
257,580 |
|
|
Supplemental Cash Flow
Disclosures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
|
$ |
9,668 |
|
|
|
$ |
9,676 |
|
|
|
$ |
9,668 |
|
Income taxes paid |
|
|
$ |
201,232 |
|
|
|
$ |
167,478 |
|
|
|
$ |
164,223 |
|
|
Non-Cash Investing
Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in fair value of investment
securities |
|
|
$ |
1,435 |
|
|
|
$ |
(2,514 |
) |
|
|
$ |
1,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these consolidated financial
statements.
33
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note A: Summary of Significant Accounting
Policies
Business. Ross Stores, Inc. and its subsidiaries
(the “Company”) is an off-price retailer of first-quality, name brand apparel,
shoes, and accessories for the entire family, as well as gift items, linens and
other home-related merchandise. At the end of fiscal 2009, the Company operated
953 Ross Dress for Less® (“Ross”) locations in
27 states and Guam and 52 dd’s DISCOUNTS® stores in four states,
all of which are supported by four distribution centers. The Company’s
headquarters, one buying office, two distribution centers and 26% of its stores
are located in California.
Segment reporting. The Company has one reportable segment.
The Company’s operations include only activities related to off-price retailing
in stores throughout the United States.
Basis of presentation and fiscal year.
The consolidated
financial statements include the accounts of the Company and its subsidiaries,
all of which are wholly-owned. Intercompany transactions and accounts have been
eliminated. The Company follows the National Retail Federation fiscal calendar
and utilizes a 52-53 week fiscal year whereby the fiscal year ends on the
Saturday nearest to January 31. The fiscal years ended January 30, 2010, January
31, 2009 and February 2, 2008 are referred to as fiscal 2009, fiscal 2008, and
fiscal 2007, respectively, and were 52 weeks.
Use of accounting estimates.
The preparation of
consolidated financial statements in conformity with Generally Accepted
Accounting Principles in the United States of America (“GAAP”) requires the
Company to make estimates and assumptions that affect the reported amounts of
assets, liabilities, and disclosures of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates. The Company’s significant accounting estimates include
valuation of merchandise inventory and long-lived assets and accruals for
self-insurance.
Purchase obligations. As of January 30, 2010, the Company had
purchase obligations of approximately $1,087 million. These purchase obligations
primarily consist of merchandise inventory purchase orders, commitments related
to store fixtures and supplies, and information technology service and
maintenance contracts. Merchandise inventory purchase orders of $1,044 million
represent purchase obligations of less than one year as of January 30,
2010.
Cash and cash equivalents.
Cash equivalents
consist of highly liquid, fixed income instruments purchased with an original
maturity of three months or less.
Investments. The Company’s investments are comprised
of various debt securities. At January 30, 2010 and January 31, 2009, these
investments were classified as available-for-sale and are stated at fair value.
Investments are classified as either short- or long-term based on their original
maturities and the Company’s intent. Investments with an original maturity of
less than one year are classified as short-term. See Note B for additional
information.
Merchandise inventory.
Merchandise inventory
is stated at the lower of cost (determined using a weighted average basis) or
net realizable value. The Company purchases manufacturer overruns and canceled
orders both during and at the end of a season which are referred to as
"packaway" inventory. Packaway inventory is purchased with the intent that it
will be stored in the Company's warehouses until a later date, which may even be
the beginning of the same selling season in the following year. Packaway
inventory accounted for approximately 38% of total inventories as of January 30,
2010 and January 31, 2009. The cost of the Company’s merchandise inventory is
reduced by valuation reserves for shortage based on historical shortage
experience from the Company’s physical merchandise inventory counts and cycle
counts. Merchandise inventory includes acquisition, processing, and storage
costs related to packaway inventory.
34
Cost of goods sold. In addition to product
costs, the Company includes in cost of goods sold its buying, distribution and
freight expenses as well as occupancy costs, and depreciation and amortization
related to the Company’s retail stores, buying and distribution facilities.
Buying expenses include costs to procure merchandise inventories. Distribution
expenses include the cost of operating the Company’s distribution
centers.
Property and equipment.
Property and
equipment, which include amounts recorded under capital leases, are stated at
cost, less accumulated depreciation and amortization. Depreciation is calculated
using the straight-line method over the estimated useful life of the asset,
typically ranging from five to twelve years for equipment and 20 to 40 years for
real property. Depreciation and amortization expense on property and equipment
was $153.1 million, $134.0 million and $120.7 million for fiscal 2009, 2008, and
2007, respectively. The cost of leasehold improvements is amortized over the
useful life of the asset or the applicable lease term, whichever is less.
Computer hardware and software costs, net of amortization, of $106.7 million and
$125.8 million at January 30, 2010 and January 31, 2009, respectively, are
included in fixtures and equipment and are amortized over their estimated useful
life generally ranging from five to seven years. Capital leases, net of
depreciation, of $0.6 million at January 30, 2010 consist of distribution center
equipment and have terms of two to three years. The Company capitalizes interest
during the construction period. Interest capitalized was $1.8 million and $3.2
million in fiscal 2009 and fiscal 2008, respectively.
Other long-term
assets. Other
long-term assets as of January 30, 2010 and January 31, 2009 consisted of the
following:
|
|
|
|
|
|
|
($000) |
|
2009 |
|
2008 |
Deferred compensation (Note B) |
|
$ |
50,706 |
|
$ |
37,304 |
Goodwill |
|
|
2,889 |
|
|
2,889 |
Deposits |
|
|
3,000 |
|
|
3,851 |
Other |
|
|
6,744 |
|
|
8,082 |
Total |
|
$ |
63,339 |
|
$ |
52,126 |
|
|
|
|
|
|
|
Other
assets are principally comprised of prepaid rent
and other long term prepayments.
Property, other
long-term assets, and certain identifiable intangibles that are subject to
amortization are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Intangible assets that are not subject to amortization, including
goodwill, are tested for impairment annually or more frequently if events or
changes in circumstances indicate that the asset may be impaired. Based on the
Company’s evaluation during fiscal 2009, fiscal 2008, and fiscal 2007, no
impairment charges were recorded.
Store closures. The Company continually reviews the
operating performance of individual stores. For stores that are closed, the
Company records a liability for future minimum lease payments net of estimated
sublease recoveries and related ancillary costs at the time the liability is
incurred. In 2009, the Company closed three Ross Dress for Less and four dd’s
DISCOUNTS locations. In 2008, the Company closed six Ross Dress for Less and
five dd’s DISCOUNTS locations. The lease loss liability related to certain of
these closed stores was $6.2 million and $1.0 million, as of January 30, 2010
and January 31, 2009, respectively. Operating costs, including depreciation, of
stores to be closed are expensed during the period they remain in
use.
Accounts payable. Accounts payable represents amounts owed
to third parties at the end of the period. Accounts payable includes book cash
overdrafts (checks issued under zero balance accounts not yet presented for
payment) in excess of cash balances in such accounts of approximately $125.7
million and $97.2 million at January 30, 2010 and January 31, 2009,
respectively. The Company includes the change in book cash overdrafts in
operating cash flows.
35
Self-insurance. The Company is self-insured for workers’
compensation, general liability insurance costs and costs of certain medical
plans. The self-insurance liability is determined actuarially, based on claims
filed and an estimate of claims incurred but not yet reported. Self-insurance
reserves as of January 30, 2010 and January 31, 2009 consisted of the following:
|
|
|
|
|
($000) |
|
2009 |
|
2008 |
Workers’ Compensation |
|
$ |
61,525 |
|
$ |
57,466 |
General Liability |
|
|
19,196 |
|
|
18,294 |
Medical Plans |
|
|
3,107 |
|
|
3,166 |
Total |
|
$ |
83,828 |
|
$ |
78,926 |
|
|
|
|
|
|
|
Workers’
compensation and self-insured medical plan liabilities are included in accrued
payroll and benefits and accruals for general liability are included in accrued
expenses and other in the accompanying consolidated balance sheets.
Other long-term
liabilities. Other
long-term liabilities as of January 30, 2010 and January 31, 2009 consisted of
the following:
|
|
|
|
|
($000) |
|
2009 |
|
2008 |
Deferred rent |
|
$ |
58,954 |
|
$ |
57,428 |
Deferred compensation |
|
|
50,706 |
|
|
37,304 |
Tenant improvement allowances |
|
|
26,559 |
|
|
29,818 |
Income taxes (See Note F) |
|
|
33,570 |
|
|
26,019 |
Other |
|
|
4,754 |
|
|
6,157 |
Total |
|
$ |
174,543 |
|
$ |
156,726 |
|
|
|
|
|
|
|
Lease accounting. When a lease contains “rent holidays” or
requires fixed escalations of the minimum lease payments, the Company records
rental expense on a straight-line basis over the term of the lease and the
difference between the average rental amount charged to expense and the amount
payable under the lease is recorded as deferred rent. The Company amortizes
deferred rent on a straight-line basis over the lease term commencing on the
possession date. Tenant improvement allowances are included in other long-term
liabilities and are amortized over the lease term. Changes in tenant improvement
allowances are included as a component of operating activities in the
consolidated statements of cash flows.
Estimated fair value of financial
instruments. The
carrying value of cash and cash equivalents, short- and long-term investments,
accounts receivable, and accounts payable approximates their estimated fair
value. See Note B and Note D for additional fair value information.
Revenue recognition. The Company recognizes revenue at the
point of sale and maintains an allowance for estimated future returns. Sales of
gift cards are deferred until they are redeemed for the purchase of Company
merchandise. Sales tax collected is not recognized as revenue and is included in
accrued expenses and other.
36
Allowance for sales returns.
An allowance for the
gross margin loss on estimated sales returns is included in accrued expenses and
other in the consolidated balance sheets. The allowance for sales returns
consists of the following:
|
($000) |
|
Beginning balance |
|
Additions |
|
Returns |
|
Ending balance |
|
|
Year ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30, 2010 |
|
|
$ |
4,702 |
|
$ |
506,249 |
|
$ |
(505,607 |
) |
|
|
$ |
5,344 |
|
|
January 31, 2009 |
|
|
$ |
4,559 |
|
$ |
452,035 |
|
$ |
(451,892 |
) |
|
|
$ |
4,702 |
|
|
February 2, 2008 |
|
|
$ |
4,320 |
|
$ |
408,434 |
|
$ |
(408,195 |
) |
|
|
$ |
4,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store pre-opening. Store pre-opening costs are expensed in
the period incurred.
Advertising. Advertising costs are expensed in the
period incurred. Advertising costs for fiscal 2009, 2008, and 2007 were $53.5
million, $53.9 million, and $50.2 million, respectively.
Stock-based compensation.
The Company
recognizes compensation expense based upon the grant date fair value of all
stock-based awards, typically over the vesting period. See Note C for more
information on the Company’s stock-based compensation plans.
Taxes on earnings. The Company accounts for income taxes in
accordance with Accounting Standards Codification (“ASC”) 740-10, “Accounting
for Income Taxes,” which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's consolidated financial statements or tax returns. In
estimating future tax consequences, the Company generally considers all expected
future events other than changes in the tax law or tax rates. ASC 740-10 also
clarifies the criteria that an individual tax position must satisfy for some or
all of the benefits of that position to be recognized in a company’s
consolidated financial statements and prescribes a recognition threshold of
more-likely-than-not, and a measurement standard for all tax positions taken or
expected to be taken on a tax return, in order for those tax positions to be
recognized in the consolidated financial statements. See Note F.
Treasury stock. The Company records treasury stock at
cost. Treasury stock includes shares purchased from employees for tax
withholding purposes related to vesting of restricted stock grants.
Earnings per share (“EPS”). The
Company computes and reports both basic EPS and diluted EPS. Basic EPS is
computed by dividing net earnings by the weighted average number of common
shares outstanding for the period. Diluted EPS is computed by dividing net
earnings by the sum of the weighted average number of common shares and dilutive
common stock equivalents outstanding during the period. Diluted EPS reflects the
total potential dilution that could occur from outstanding equity plan awards,
including unexercised stock options and unvested shares of both performance and
non-performance based awards of restricted stock.
In fiscal 2009,
2008, and 2007 there were 19,800, 583,000, and 1,277,000 weighted average
shares, respectively, 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 for those years.
37
The following is
a reconciliation of the number of shares (denominator) used in the basic and
diluted EPS computations:
|
|
|
|
|
|
Effect
of dilutive |
|
|
|
|
|
|
|
Basic |
|
common stock |
|
Diluted |
|
|
Shares in
(000s) |
|
EPS |
|
equivalents |
|
EPS |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
122,887 |
|
|
2,127 |
|
|
|
125,014 |
|
|
Amount |
|
$ |
3.60 |
|
$ |
(.06 |
) |
|
$ |
3.54 |
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
129,235 |
|
|
2,080 |
|
|
|
131,315 |
|
|
Amount |
|
$ |
2.36 |
|
$ |
(.03 |
) |
|
$ |
2.33 |
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
135,093 |
|
|
2,049 |
|
|
|
137,142 |
|
|
Amount |
|
$ |
1.93 |
|
$ |
(.03 |
) |
|
$ |
1.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales mix. The Company’s sales mix is shown below
for fiscal 2009, 2008, and 2007:
|
|
|
2009 |
|
2008 |
|
2007 |
|
|
Ladies |
|
30% |
|
32% |
|
32% |
|
|
Home accents and bed and bath |
|
24% |
|
23% |
|
23% |
|
|
Men’s |
|
13% |
|
14% |
|
15% |
|
|
Accessories, lingerie, fine jewelry, and fragrances |
|
13% |
|
12% |
|
11% |
|
|
Shoes |
|
11% |
|
10% |
|
10% |
|
|
Children’s |
|
9% |
|
9% |
|
9% |
|
|
Total |
|
100% |
|
100% |
|
100% |
|
|
|
|
|
|
|
|
|
|
Comprehensive income. Comprehensive income consists of net
earnings and other comprehensive income, principally unrealized investment gains
or losses. Components of comprehensive income are presented in the consolidated
statements of stockholders’ equity.
New accounting standards.
In June 2009, the
Financial Accounting Standards Board (“FASB”) issued ASC 810 (originally issued
as SFAS No. 167, “Amendments to FASB Interpretation No. 46(R))”. Among other
things, ASC 810 responds to concerns about the application of certain key
provisions of FIN 46(R), including those regarding the transparency of the
involvement with variable interest entities. ASC 810 is effective for fiscal
years beginning after November 15, 2009. The Company does not believe the
adoption of ASC 810 will have a material impact on its consolidated financial
statements.
38
Note B: Investments
The amortized cost and fair value of the
Company’s available-for-sale securities as of January 30, 2010
were:
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Short- |
|
Long- |
|
|
($000) |
|
cost |
|
gains |
|
losses |
|
value |
|
|
term |
|
term |
|
|
Auction-rate securities |
|
$ |
1,050 |
|
$ |
- |
|
$ |
(158 |
) |
|
$ |
892 |
|
|
$ |
- |
|
$ |
892 |
|
|
Corporate securities |
|
|
9,704 |
|
|
567 |
|
|
(67 |
) |
|
|
10,204 |
|
|
|
1,073 |
|
|
9,131 |
|
|
U.S. Government and
agency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities |
|
|
5,247 |
|
|
30 |
|
|
(187 |
) |
|
|
5,090 |
|
|
|
- |
|
|
5,090 |
|
|
Mortgage-backed securities |
|
|
2,340 |
|
|
79 |
|
|
(3 |
) |
|
|
2,416 |
|
|
|
681 |
|
|
1,735 |
|
|
Total |
|
$ |
18,341 |
|
$ |
676 |
|
$ |
(415 |
) |
|
$ |
18,602 |
|
|
$ |
1,754 |
|
$ |
16,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of the
Company’s available-for-sale securities as of January 31, 2009
were:
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
|
Short- |
|
Long- |
|
|
($000) |
|
cost |
|
gains |
|
losses |
|
value |
|
|
term |
|
term |
|
|
Auction-rate securities |
|
$ |
1,100 |
|
$ |
- |
|
$ |
- |
|
|
$ |
1,100 |
|
|
$ |
- |
|
$ |
1,100 |
|
|
Asset-backed securities |
|
|
984 |
|
|
5 |
|
|
(200 |
) |
|
|
789 |
|
|
|
389 |
|
|
400 |
|
|
Corporate securities |
|
|
13,773 |
|
|
152 |
|
|
(685 |
) |
|
|
13,240 |
|
|
|
- |
|
|
13,240 |
|
|
U.S. Government and agency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
securities |
|
|
15,940 |
|
|
446 |
|
|
- |
|
|
|
16,386 |
|
|
|
- |
|
|
16,386 |
|
|
Mortgage-backed
securities |
|
|
8,189 |
|
|
119 |
|
|
(1,011 |
) |
|
|
7,297 |
|
|
|
409 |
|
|
6,888 |
|
|
Total |
|
$ |
39,986 |
|
$ |
722 |
|
$ |
(1,896 |
) |
|
$ |
38,812 |
|
|
$ |
798 |
|
$ |
38,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 30, 2010, the Company had
investments of approximately $18.3 million of which $5.0 million had gross
unrealized losses of $0.2 million that had been in a continuous unrealized loss
position for more than twelve months. Of the remaining $13.3 million, $3.0
million of investments had gross unrealized losses of $0.2 million which had
been in a continuous unrealized loss position for less than twelve months. These
unrealized losses on investments were caused primarily by the decline in market
values of floating rate corporate and auction rate securities and the impact of
interest yield fluctuations on long-term treasury securities. The Company does
not consider these investments to be other than temporarily impaired at January
30, 2010.
In applying the valuation principles to
financial assets and liabilities, a three-tier fair value hierarchy was used to
prioritize the inputs used in the valuation methodologies as
follows:
Level 1—Observable inputs that reflect
quoted prices (unadjusted) for identical assets or liabilities in active
markets.
Level 2—Include other inputs that are
directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs which are
supported by little or no market activity.
This fair value hierarchy also requires
the Company to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. Asset-backed, corporate, U.S.
Government and agency, and mortgage-backed securities are classified within
Level 1 or Level 2 because these securities are valued using quoted market
prices or alternative pricing sources and models utilizing market observable
inputs. The Company’s investment in auction rate securities is classified within
Level 3 because these are valued using valuation techniques for which some of
the inputs to these models are unobservable in the market.
39
Assets measured
at fair value on a recurring basis at January 30, 2010 are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements at Reporting Date |
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
|
|
January 30, |
|
Assets |
|
Inputs |
|
Inputs |
|
|
($000) |
|
2010 |
|
(Level
1) |
|
(Level
2) |
|
(Level
3) |
|
|
Auction-rate securities |
|
$ |
892 |
|
$ |
- |
|
$ |
- |
|
|
$ |
892 |
|
|
Corporate securities |
|
|
10,204 |
|
|
- |
|
|
10,204 |
|
|
|
- |
|
|
U.S. Government and agency
securities |
|
|
5,090 |
|
|
5,090 |
|
|
- |
|
|
|
- |
|
|
Mortgage-backed securities |
|
|
2,416 |
|
|
- |
|
|
2,416 |
|
|
|
- |
|
|
Total assets measured at fair
value |
|
$ |
18,602 |
|
$ |
5,090 |
|
$ |
12,620 |
|
|
$ |
892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets measured
at fair value on a recurring basis at January 31, 2009 are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements at Reporting Date |
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
Markets for |
|
Other |
|
Significant |
|
|
|
|
|
|
|
Identical |
|
Observable |
|
Unobservable |
|
|
|
|
January 31, |
|
Assets |
|
Inputs |
|
Inputs |
|
|
($000) |
|
2009 |
|
(Level
1) |
|
(Level
2) |
|
(Level
3) |
|
|
Auction-rate securities |
|
$ |
1,100 |
|
$ |
- |
|
$ |
- |
|
|
$ |
1,100 |
|
|
Asset-backed securities |
|
|
789 |
|
|
- |
|
|
789 |
|
|
|
- |
|
|
Corporate securities |
|
|
13,240 |
|
|
- |
|
|
13,240 |
|
|
|
- |
|
|
U.S. Government and agency securities |
|
|
16,386 |
|
|
16,386 |
|
|
- |
|
|
|
- |
|
|
Mortgage-backed
securities |
|
|
7,297 |
|
|
- |
|
|
7,297 |
|
|
|
- |
|
|
Total assets measured at fair value |
|
$ |
38,812 |
|
$ |
16,386 |
|
$ |
21,326 |
|
|
$ |
1,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The maturities
of investment securities at January 30, 2010 were:
|
|
|
|
|
|
Estimated |
|
|
($000) |
|
Cost
basis |
|
fair
value |
|
|
Maturing in one year or
less |
|
$ |
1,722 |
|
$ |
1,754 |
|
|
Maturing after one year through five years |
|
|
6,446 |
|
|
6,812 |
|
|
Maturing after five years through
ten years |
|
|
9,123 |
|
|
9,144 |
|
|
Maturing after ten years |
|
|
1,050 |
|
|
892 |
|
|
Total |
|
$ |
18,341 |
|
$ |
18,602 |
|
|
|
|
|
|
|
|
|
|
40
The maturities
of investment securities at January 31, 2009 were:
|
|
|
|
|
|
Estimated |
|
|
($000) |
|
Cost
basis |
|
fair
value |
|
|
Maturing in one year or
less |
|
$ |
886 |
|
$ |
798 |
|
|
Maturing after one year through five years |
|
|
25,646 |
|
|
25,600 |
|
|
Maturing after five years through
ten years |
|
|
11,525 |
|
|
10,532 |
|
|
Maturing after ten years |
|
|
1,929 |
|
|
1,882 |
|
|
Total |
|
$ |
39,986 |
|
$ |
38,812 |
|
|
|
|
|
|
|
|
|
|
The underlying
assets in the Company’s non-qualified deferred compensation program totaling
$50.7 million as of January 30, 2010 (included in Other long-term assets and in
Other long-term liabilities) primarily consist of participant directed money
market mutual funds, as well as stable value, stock, and bond funds. The fair
value measurement for funds that are quoted market prices in active markets
(Level 1) totaled $43.9 million as of January 30, 2010. The fair value
measurement for the stable value funds without quoted market prices in active
markets (Level 2) totaled $6.8 million as of January 30, 2010. Fair market value
for these funds is considered to be the sum of participant funds invested under
the contract plus accrued interest.
Note C: Stock-based
compensation
For fiscal 2009,
2008, and 2007, the Company recognized stock-based compensation expense as
follows:
|
($000) |
|
2009 |
|
2008 |
|
2007 |
|
|
ESPP and stock options |
|
$ |
2,952 |
|
$ |
5,359 |
|
$ |
9,083 |
|
|
Restricted stock and performance awards |
|
|
22,794 |
|
|
17,216 |
|
|
16,082 |
|
|
Total |
|
$ |
25,746 |
|
$ |
22,575 |
|
$ |
25,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
stock-based compensation cost was not significant in any year.
No stock options
were granted during 2009 or 2008. Beginning in 2008, the Company eliminated a
lookback option in determining the purchase price for shares purchased under the
ESPP. The Company recognizes expense for ESPP purchase rights equal to the value
of the 15% discount given on the purchase date. At January 30, 2010, the Company
had one stock-based compensation plan, which is further described in Note
H.
The fair value
of stock options granted during fiscal 2007 was estimated using a 3.9 year
expected life from grant date, volatility of 28.4%, risk-free interest rate of
4.7%, and dividend yield of 0.9%. The fair value of ESPP rights granted during
fiscal 2007 was estimated using a one year expected life from grant date, 26.4%
expected volatility, 5.0% risk-free interest rate, and 0.9% dividend yield. The
weighted average fair values per share of stock options granted and employee
stock purchase plan shares issued during 2007 were $9.12 and $8.02,
respectively.
41
Total
stock-based compensation recognized in the Company’s consolidated Statements of
Earnings for fiscal 2009, 2008, and 2007 is as follows:
|
Statements of Earnings Classification ($000) |
|
2009 |
|
2008 |
|
2007 |
|
|
Cost of goods sold |
|
$ |
11,912 |
|
$ |
10,021 |
|
$ |
10,736 |
|
|
Selling, general and administrative |
|
|
13,834 |
|
|
12,554 |
|
|
14,429 |
|
|
Total |
|
$ |
25,746 |
|
$ |
22,575 |
|
$ |
25,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note D: Debt
Revolving credit
facilities. The
Company has a $600 million revolving credit facility with an expiration date of
July 2011 and interest pricing at LIBOR plus 45 basis points. This facility
contains a $300 million sublimit for issuance of standby letters of credit, of
which $234.8 million was available at January 30, 2010. Interest is payable upon
borrowing maturity but no less than quarterly. Borrowing under this credit
facility is subject to maintaining certain financial ratios. As of January 30,
2010 and January 31, 2009, the Company had no borrowings outstanding under this
facility and was in compliance with the covenants.
Senior Notes. The Company has two series of unsecured
senior notes with various institutional investors for $150 million. 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%. The fair value of these notes as of January
30, 2010 of approximately $164 million is estimated by obtaining comparable
market quotes. Borrowings under these notes are subject to certain covenants
including interest coverage and other financial ratios. As of January 30, 2010,
the Company was in compliance with these covenants. The senior notes are subject
to prepayment penalties for early payment of principal.
Letters of credit. The Company uses standby letters of
credit to collateralize certain obligations related to its self-insured workers’
compensation and general liability programs. The Company had $65.2 million and
$60.4 million in standby letters of credit at January 30, 2010 and January 31,
2009, respectively.
The Company also
had $32.9 million and $16.7 million in trade letters of credit outstanding at
January 30, 2010 and January 31, 2009, respectively.
Note E: Leases
The Company
leases all but two of its store sites with original, non-cancelable terms that
in general range from three to ten years. Store leases typically contain
provisions for three to four renewal options of five years each. Most store
leases also provide for minimum annual rentals and for payment of certain
expenses. In addition, some store leases also have provisions for additional
rent based on a percentage of sales.
The Company has
lease arrangements for certain equipment in its stores for its point-of-sale
(“POS”) hardware and software systems. These leases are accounted for as
operating leases for financial reporting purposes. The initial terms of these
leases are either two or three years and the Company typically has options to
renew the leases for two to three one-year periods. Alternatively, the Company
may purchase or return the equipment at the end of the initial or each renewal
term. The Company’s obligation under the residual value guarantee at the end of
the respective lease terms is $2.6 million.
42
The Company also leases a 1.3 million square foot distribution center in
Perris, California. The land and building for this distribution center are
financed under a $70 million ten-year synthetic lease facility that expires in
July 2013. Rent expense on this distribution center is payable monthly at a
fixed annual rate of 5.8% on the lease balance of $70 million. At the end of the
lease term, the Company must either refinance the distribution facility,
purchase it at the amount of the then-outstanding lease balance, or sell it to a
third party. If the distribution center is sold to a third party for less than
$70 million, the Company has agreed under a residual value guarantee to pay the
lessor any shortfall amount up to $56 million. The agreement includes a
prepayment penalty for early payoff of the lease.
The Company has recognized a liability and corresponding asset for the
inception date estimated fair value of the residual value guarantee in the
amount of $8.3 million for the Perris, California distribution center and $0.9
million for the POS leases. These residual value guarantees are amortized on a
straight-line basis over the original terms of the leases. The current portion
of the related asset and liability is recorded in “Prepaid expenses and other”
and “Accrued expenses and other,” respectively, and the long-term portion of the
related assets and liabilities is recorded in “Other long-term assets” and
“Other long-term liabilities,” respectively, in the accompanying consolidated
balance sheets.
The Company
leases two warehouses in Carlisle, Pennsylvania with one lease expiring in 2013
and the other expiring in 2014. In January 2009, the Company exercised a
three-year option for a 255,000 square foot warehouse in Fort Mill, South
Carolina, extending the term to February 2013. In June 2008, the Company
purchased a 423,000 square foot warehouse also in Fort Mill, South Carolina. All
four of these properties are used to store the Company’s packaway inventory. The
Company also leases a 10-acre parcel that has been developed for trailer parking
adjacent to its Perris distribution center.
The synthetic
lease facilities described above, as well as the Company’s revolving credit
facility and senior notes, have covenant restrictions requiring the Company to
maintain certain interest coverage and other financial ratios. In addition, the
interest rates under the revolving credit facility may vary depending on the
Company’s actual interest coverage ratios. As of January 30, 2010, the Company
was in compliance with these covenants.
The Company
leases approximately 181,000 square feet of office space for its corporate
headquarters in Pleasanton, California, under several facility leases. The lease
terms for these facilities expire between 2011 and 2015 and contain renewal
provisions.
The Company
leases approximately 197,000 and 26,000 square feet of office space for its New
York City and Los Angeles buying offices, respectively. The lease terms for
these facilities expire in 2021 and 2014, respectively and contain renewal
provisions.
43
The aggregate future minimum annual lease
payments under leases in effect at January 30, 2010 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
Residual |
|
|
|
|
|
|
|
Capital |
|
Operating |
|
Synthetic |
|
value |
|
|
|
|
|
($000) |
|
leases |
|
leases |
|
leases |
|
guarantees |
|
Total leases |
|
2010 |
|
$ |
291 |
|
$ |
333,077 |
|
$ |
5,681 |
|
$ |
1,564 |
|
$ |
340,613 |
|
|
2011 |
|
|
34 |
|
|
347,150 |
|
|
4,674 |
|
|
714 |
|
|
352,572 |
|
|
2012 |
|
|
11 |
|
|
313,200 |
|
|
4,212 |
|
|
316 |
|
|
317,739 |
|
|
2013 |
|
|
- |
|
|
276,459 |
|
|
1,705 |
|
|
56,000 |
|
|
334,164 |
|
|
2014 |
|
|
- |
|
|
225,677 |
|
|
- |
|
|
- |
|
|
225,677 |
|
|
Thereafter |
|
|
- |
|
|
500,278 |
|
|
- |
|
|
- |
|
|
500,278 |
|
|
Total minimum lease
payments |
|
$ |
336 |
|
$ |
1,995,841 |
|
$ |
16,272 |
|
$ |
58,594 |
|
$ |
2,071,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rent
expense for all leases was $336.5 million in 2009, $325.9 million in 2008, and
$301.6 million in 2007.
Note F: Taxes on
Earnings
The provision
for taxes consisted of the following:
|
($000) |
|
2009 |
|
2008 |
|
2007 |
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
242,111 |
|
$ |
152,833 |
|
$ |
160,155 |
|
|
State |
|
|
17,548 |
|
|
13,285 |
|
|
14,613 |
|
|
|
|
|
259,659 |
|
|
166,118 |
|
|
174,768 |
|
|
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
13,417 |
|
|
23,621 |
|
|
(9,263 |
) |
|
State |
|
|
2,696 |
|
|
183 |
|
|
(1,436 |
) |
|
|
|
|
16,113 |
|
|
23,804 |
|
|
(10,699 |
) |
|
Total |
|
$ |
275,772 |
|
$ |
189,922 |
|
$ |
164,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2009,
2008, and 2007, the Company realized tax benefits of $8.6 million, $8.5 million
and $6.5 million, respectively, related to employee equity programs that were
credited to additional paid-in capital.
The provision
for taxes for financial reporting purposes is different from the tax provision
computed by applying the statutory federal income tax rate. Differences are as
follows:
|
|
|
2009 |
|
2008 |
|
2007 |
|
|
Federal income taxes at the
statutory rate |
|
35% |
|
35% |
|
35% |
|
|
State income taxes (net of federal
benefit) and other, net |
|
3% |
|
3% |
|
4% |
|
|
|
|
38% |
|
38% |
|
39% |
|
|
|
|
|
|
|
|
|
|
44
The components
of deferred income taxes at January 30, 2010 and January 31, 2009 are as
follows:
|
($000) |
|
|
2009 |
|
|
2008 |
|
|
Deferred Tax
Assets |
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
$ |
29,014 |
|
|
$ |
25,015 |
|
|
Deferred rent |
|
|
11,094 |
|
|
|
10,490 |
|
|
Employee benefits |
|
|
- |
|
|
|
7,861 |
|
|
Accrued liabilities |
|
|
20,275 |
|
|
|
18,776 |
|
|
California franchise taxes |
|
|
5,399 |
|
|
|
3,701 |
|
|
Stock-based compensation |
|
|
7,224 |
|
|
|
7,771 |
|
|
Other |
|
|
9,995 |
|
|
|
8,573 |
|
|
|
|
|
83,001 |
|
|
|
82,187 |
|
|
Deferred Tax
Liabilities |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
(138,134 |
) |
|
|
(121,952 |
) |
|
Merchandise inventory |
|
|
(24,652 |
) |
|
|
(30,627 |
) |
|
Employee benefits |
|
|
(5,529 |
) |
|
|
- |
|
|
Supplies |
|
|
(7,811 |
) |
|
|
(7,015 |
) |
|
Prepaid expenses |
|
|
(6,052 |
) |
|
|
(5,657 |
) |
|
|
|
|
(182,178 |
) |
|
|
(165,251 |
) |
|
Net Deferred Tax
Liabilities |
|
$ |
(99,177 |
) |
|
$ |
(83,064 |
) |
|
Classified as: |
|
|
|
|
|
|
|
|
|
Current net deferred tax (liability) asset |
|
$ |
(2,894 |
) |
|
$ |
14,093 |
|
|
Long-term net deferred tax liability |
|
|
(96,283 |
) |
|
|
(97,157 |
) |
|
Net Deferred Tax
Liabilities |
|
$ |
(99,177 |
) |
|
$ |
(83,064 |
) |
|
|
|
|
|
|
|
|
|
|
Effective
February 4, 2007, the Company adopted new accounting guidance on the accounting
for uncertainty in income taxes. As a result, the Company established a $26.3
million reserve for unrecognized tax benefits, inclusive of $6.0 million of
related interest. The reserve is classified as a long-term liability and
included in other long-term liabilities in the Company’s consolidated balance
sheets. Upon adoption of ASC 740, the Company also recognized a reduction in
retained earnings of $7.4 million and certain other deferred income tax assets
and liabilities were reclassified.
The changes in
amounts of unrecognized tax benefits (gross of federal tax benefits and
excluding interest) at fiscal 2009, 2008, and 2007 are as follows:
|
($000) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
Unrecognized tax benefits -
beginning of year |
|
$ |
26,338 |
|
|
$ |
23,218 |
|
|
$ |
25,680 |
|
|
Gross increases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax positions in current
period |
|
|
7,314 |
|
|
|
4,695 |
|
|
|
5,451 |
|
|
Tax positions in prior
period |
|
|
2,308 |
|
|
|
3,658 |
|
|
|
1,486 |
|
|
Gross decreases: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax positions in prior
periods |
|
|
- |
|
|
|
(1,115 |
) |
|
|
(6,352 |
) |
|
Lapse of statute
limitations |
|
|
(1,731 |
) |
|
|
(1,783 |
) |
|
|
(3,004 |
) |
|
Settlements |
|
|
(880 |
) |
|
|
(2,335 |
) |
|
|
(43 |
) |
|
Unrecognized tax benefits - end of
year |
|
$ |
33,349 |
|
|
$ |
26,338 |
|
|
$ |
23,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
In fiscal 2009,
2008, and 2007, the reserves for unrecognized tax benefits (net of federal tax
benefits) were $33.6 million, $26.0 million, and $23.2 million inclusive of
$10.0 million, $6.5 million, and $5.6 million of related interest, respectively.
The Company accounts for interest and penalties related to unrecognized tax
benefits as a part of its provision for taxes on earnings. If recognized, $26.9
million would impact the Company’s effective tax rate. The difference between
the total amount of unrecognized tax benefits and the amounts that would impact
the effective tax rate relates to amounts attributable to deferred income tax
assets and liabilities. These amounts are net of federal and state income taxes.
During the next
twelve months, it is reasonably possible that the statute of limitations may
lapse pertaining to positions taken by the Company in prior year tax returns. If
this occurs, the total amount of unrecognized tax benefits may decrease,
reducing the provision for taxes on earnings by up to $2.3 million.
The Company is
generally open to audit by the Internal Revenue Service under the statute of
limitations for fiscal years 2006 through 2009. The Company’s state income tax
returns are generally open to audit under the various statutes of limitations
for fiscal years 2005 through 2009. Certain state tax returns are currently
under audit by state tax authorities. The Company does not expect the results of
these audits to have a material impact on the consolidated financial statements.
Note G: Employee Benefit Plans
The Company has
a defined contribution plan that is available to certain employees. Under the
plan, employee and Company contributions and accumulated plan earnings qualify
for favorable tax treatment under Section 401(k) of the Internal Revenue Code.
This plan permits employees to make contributions up to the maximum limits
allowable under the Internal Revenue Code. The Company matches up to 4% of the
employee’s salary up to the plan limits. Company matching contributions to the
401(k) plan were $7.6 million, $7.3 million, and $6.8 million in fiscal 2009,
2008, and 2007, respectively.
The Company also
has an Incentive Compensation Plan, which provides cash awards to key management
and employees based on Company and individual performance.
The Company also
makes available to management a Non-qualified Deferred Compensation Plan which
allows management to make payroll contributions on a pre-tax basis in addition
to the 401(k) plan. Other long-term assets include $50.7 million and $37.3
million at January 30, 2010 and January 31, 2009, respectively, of long-term
plan investments, at market value, set aside or designated for the Non-qualified
Deferred Compensation Plan (See Note B). Plan investments are designated by the
participants, and investment returns are not guaranteed by the Company. The
Company has a corresponding liability to participants of $50.7 million and $37.3
million at January 30, 2010 and January 31, 2009, respectively, included in
other long-term liabilities in the consolidated balance sheets.
In addition, the
Company has certain individuals who receive or will receive post-employment
medical benefits. The estimated liability for these benefits of $3.9 million and
$4.3 million is included in accrued liabilities and other in the accompanying
consolidated balance sheets as of January 30, 2010 and January 31, 2009,
respectively.
46
Note H: Stockholders'
Equity
Common stock. In January 2008 the Company’s Board of
Directors approved a two-year stock repurchase program of up to $600 million for
fiscal 2008 and 2009. In November 2005, the Company’s Board of Directors
authorized a two-year stock repurchase program of up to $400 million for fiscal
2006 and 2007. In January 2010, the Company’s Board of Directors approved a
two-year $750 million stock repurchase program for fiscal 2010 and 2011. The
following table summarizes the Company’s stock repurchase activity in fiscal
2009, 2008, and 2007:
|
|
Shares
repurchased |
|
Average
repurchase |
|
Repurchased |
|
|
Fiscal
Year |
(in
millions) |
|
price |
|
(in
millions) |
|
|
2009 |
7.4 |
|
$ 40.68 |
|
|
$ 300 |
|
|
2008 |
9.3 |
|
$ 32.09 |
|
|
$ 300 |
|
|
2007 |
6.9 |
|
$ 29.10 |
|
|
$ 200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock. The Company has four million shares of
preferred stock authorized, with a par value of $.01 per share. No preferred
stock is issued or outstanding.
Dividends. In January 2010, the Company’s Board of
Directors declared a quarterly cash dividend of $.16 per common share, payable
on March 31, 2010. The Company’s Board of Directors declared quarterly cash
dividends of $.11 per common share in January, May, August, and November 2009,
cash dividends of $.095 per common share in January, May, August, and November
2008, and cash dividends of $.075 per common share in January, May, August, and
November 2007.
2008 Equity Incentive Plan.
On May 22, 2008, the Company’s
stockholders approved the adoption of the Ross Stores, Inc. 2008 Equity
Incentive Plan (the “2008 Plan”) with an initial share reserve of 8.3 million
shares of the Company’s common stock, of which 6.0 million shares can be issued
as full value awards. The 2008 Plan provides for various types of incentive
awards, which may potentially include the grant of stock options, stock
appreciation rights, restricted stock purchase rights, restricted stock bonuses,
restricted stock units, performance shares, performance units, and deferred
compensation awards.
47
As of January
30, 2010, there were 4.9 million shares that remained available for grant under
the 2008 Plan. A summary of the stock option activity for fiscal 2009 is
presented below.
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Weighted |
|
average |
|
|
|
|
|
|
|
|
average |
|
remaining |
|
Aggregate |
|
|
|
|
Number of |
|
exercise |
|
contractual |
|
intrinsic |
|
|
(000, except per share data) |
|
shares |
|
price |
|
term |
|
value |
|
|
Outstanding at January 31,
2009 |
|
4,534 |
|
$ 25.39 |
|
|
|
|
|
|
Granted |
|
- |
|
$ |
- |
|
|
|
|
|
|
Exercised |
|
(1,733 |
) |
$ |
25.16 |
|
|
|
|
|
|
Forfeited |
|
(28 |
) |
$ 25.75 |
|
|
|
|
|
|
|
|
|
Outstanding at January 30,
2010 |
|
2,773 |
|
$ 25.53 |
|
4.54 |
|
$ 56,568 |
|
|
Vested and Expected to Vest at
January 30, 2010 |
|
2,751 |
|
$ 25.46 |
|
4.52 |
|
$ 56,319 |
|
|
Exercisable at January 30,
2010 |
|
2,451 |
|
$ 24.38 |
|
4.20 |
|
$ 52,827 |
|
|
|
|
|
|
|
|
|
|
|
|
The following
table summarizes information about the weighted average remaining contractual
life (in years) and the weighted average exercise prices for stock options both
outstanding and exercisable as of January 30, 2010 (number of shares in
thousands):
|
|
|
|
|
|
|
|
|
Options outstanding |
|
Options exercisable |
|
|
|
|
|
|
|
|
|
|
Number of |
|
Remaining |
|
Exercise |
|
Number of |
|
Exercise |
|
|
Exercise price range |
|
shares |
|
life |
|
price |
|
shares |
|
price |
|
|
$ |
7.19 |
|
to |
|
$ |
19.02 |
|
578 |
|
1.71 |
|
|
$ 14.49 |
|
578 |
|
|
$ 14.49 |
|
|
$ |
19.13 |
|
to |
|
$ |
26.86 |
|
561 |
|
4.06 |
|
|
$ 23.73 |
|
560 |
|
|
$ 23.73 |
|
|
$ |
26.99 |
|
to |
|
$ |
28.53 |
|
556 |
|
5.45 |
|
|
$ 27.79 |
|
555 |
|
|
$ 27.79 |
|
|
$ |
28.55 |
|
to |
|
$ |
29.42 |
|
563 |
|
4.85 |
|
|
$ 28.94 |
|
562 |
|
|
$ 28.94 |
|
|
$ |
29.57 |
|
to |
|
$ |
34.37 |
|
515 |
|
6.94 |
|
|
$ 33.67 |
|
196 |
|
|
$ 32.57 |
|
|
$ |
7.19 |
|
to |
|
$ |
34.37 |
|
2,773 |
|
4.54 |
|
|
$ 25.53 |
|
2,451 |
|
|
$ 24.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
A summary of the
restricted stock activity for fiscal 2009 is presented below: