Ross Stores 10-Q 2009
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Ross Stores, Inc.
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the 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 Exchange Act). Yes No X
The number of shares of Common Stock, with $.01 par value, outstanding on May 21, 2009 was 126,648,834.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Earnings
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Three Months Ended May 2, 2009 and May 3, 2008
Note A: Summary of Significant Accounting Policies
Basis of Presentation. The accompanying unaudited interim condensed consolidated financial statements have been prepared from the records of Ross Stores, Inc. and subsidiaries (the Company) without audit and, in the opinion of management, include all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the Companys financial position as of May 2, 2009 and May 3, 2008, and the results of operations and cash flows for the three month periods then ended. The Condensed Consolidated Balance Sheet as of January 31, 2009, presented herein, has been derived from the Companys audited consolidated financial statements for the fiscal year then ended.
Accounting policies followed by the Company are described in Note A to the audited consolidated financial statements for the fiscal year ended January 31, 2009. Certain information and disclosures normally included in the notes to annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted for purposes of these interim condensed consolidated financial statements. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including notes thereto, contained in the Companys Annual Report on Form 10-K for the year ended January 31, 2009.
The results of operations for the three month periods ended May 2, 2009 and May 3, 2008 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.
Total comprehensive income. The components of total comprehensive income for the three month periods ended May 2, 2009 and May 3, 2008 are as follows (in $000):
Estimated fair value of financial instruments. The carrying value of cash and cash equivalents, short-term and long-term investments, accounts receivable, and accounts payable approximates their estimated fair value.
Sales Mix. Our sales mix is shown below for the three month periods ended May 2, 2009 and May 3, 2008:
Dividends. Dividends included in the Condensed Consolidated Statements of Cash Flows reflect actual dividends paid during the periods shown. Dividends per share reported in the Condensed Consolidated Statements of Earnings reflect dividends declared during the periods shown. In January 2009, the Companys Board of Directors declared a quarterly cash dividend of $.11 per common share that was paid in March 2009. In January 2008 the Companys Board of Directors declared a quarterly cash dividend of $.095 per common share that was paid in March 2008.
In May 2009, the Companys Board of Directors declared a cash dividend of $.11 per common share, payable on June 30, 2009.
Provision for litigation costs and other legal proceedings. Like many California retailers, the Company has 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 assistant store managers at Company stores under federal and state law remains pending as of May 2, 2009.
The Company is also party to various other legal proceedings arising in the normal course of business. Actions filed against the Company include commercial, product, customer, intellectual property, and labor and employment-related claims, including lawsuits in which plaintiffs allege that the Company violated state or federal laws. Actions against the Company are in various procedural stages. Many of these proceedings raise factual and legal issues and are subject to uncertainties.
In the opinion of management, resolution of pending class action litigation and other currently pending legal proceedings is not expected to have a material adverse effect on the Companys financial condition or results of operations.
Note B: Investments
The amortized cost and fair value of the Companys available-for-sale securities as of May 2, 2009 were:
The amortized cost and fair value of the Companys available-for-sale securities as of May 3, 2008 were:
At May 2, 2009, the Company had investments of approximately $35.4 million, of which $8.8 million had gross unrealized losses of $1.3 million which had been in a continuous unrealized loss position for more than twelve months. Of the remaining $26.6 million, $6.1 million of investments had gross unrealized losses of $0.3 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 downturn in the market values of mortgage-backed, asset-backed, and financial sector corporate securities. The Company does not consider these investments to be other than temporarily impaired at May 2, 2009.
In applying the valuation principles in SFAS No. 157 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 1Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2Include other inputs that are directly or indirectly observable in the marketplace.
Level 3Unobservable 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 Companys 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.
Assets measured at fair value are summarized below:
The underlying assets in the Companys non-qualified deferred compensation program totaling $44.7 million as of May 2, 2009 (included in Other long term assets) primarily consist of money market, stable value, stock, and bond funds. The fair value measurement for funds that are quoted market prices in active markets (Level 1) totaled $35.0 million as of May 2, 2009. The fair value measurement for funds without quoted market prices in active markets (Level 2) totaled $9.7 million as of May 2, 2009. 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
2008 Equity Incentive Plan. In May 2008, the Companys 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 Companys common stock, of which 6.0 million shares can be issued as full value awards. The 2008 Plan replaced the 2004 Equity Incentive Plan. 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.
Restricted stock. The Company grants restricted shares to directors, officers and key employees. The fair value of these shares at the date of grant is expensed on a straight-line basis over the vesting period of generally three to five years. During the three month period ended May 2, 2009, restricted stock awards totaling 698,000 shares were issued and restricted stock awards totaling 21,000 shares were forfeited. The aggregate unamortized compensation expense at May 2, 2009 was $47.4 million. During the quarter ended May 2, 2009, shares purchased by the Company for tax withholding totaled approximately 117,000 shares and are considered treasury shares which are available for reissuance. As of May 2, 2009, shares subject to repurchase related to unvested restricted stock totaled 2.2 million shares.
Performance shares. The Company has a performance share award program for senior executives. A performance share award represents a right to receive shares of common stock on a specified settlement date based on the Companys attainment of a profitability-based performance goal during the performance period. If attained, the common stock then granted vests over a specified remaining service period, generally two years. For the three month periods ended May 2, 2009 and May 3, 2008, the Company recognized $1.3 million and $0.1 million, respectively, of expense related to performance share awards.
Employee stock purchase plan. Under the Employee Stock Purchase Plan (ESPP), eligible full-time employees participating in the annual offering period can choose to have up to the lesser of 10% or $21,250 of their annual base earnings withheld to purchase the Companys common stock. The purchase price of the stock is 85% of the closing market price on the date of purchase. In addition, purchases occur on a quarterly basis (on the last trading day of each calendar quarter). Prior to 2008, the purchase price of the stock was the lower of 85% of the market price at the beginning of the offering period, or end of the offering period.
Stock-based compensation. For the three month periods ended May 2, 2009 and May 3, 2008, the Company recognized stock-based compensation expense as follows:
No stock options were granted during the three month periods ended May 2, 2009 and May 3, 2008. The Company recognizes expense for ESPP purchase rights equal to the value of the 15% discount given on the purchase date.
Total stock-based compensation recognized in the Companys Condensed Consolidated Statements of Earnings for the three month periods ended May 2, 2009 and May 3, 2008 is classified as follows:
Stock option activity. The following table summarizes stock option activity for the three month period ended May 2, 2009:
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 May 2, 2009 (number of shares in thousands):
Note D: Earnings Per Share
SFAS No. 128, Earnings Per Share, requires earnings per share (EPS) to be computed and reported as 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. Dilutive 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.
For the three month periods ended May 2, 2009 and May 3, 2008, there were approximately 541,600 and 692,400 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 in the periods presented.
The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations:
Note E: Debt
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. The Company had no borrowings outstanding under this facility as of May 2, 2009, January 31, 2009, and May 3, 2008 and was in compliance with the covenants.
The Company has a Note Purchase Agreement with various institutional investors for $150 million of unsecured, senior notes. The notes were issued in two series and funding occurred in December 2006. 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 May 2, 2009 of approximately $153 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 May 2, 2009, the Company was in compliance with these covenants.
Note F: Taxes on Earnings
As of May 2, 2009 and May 3, 2008, the reserves for unrecognized tax benefits (net of federal tax benefits) were $26.5 million and $23.4 million inclusive of $6.9 million and $6.2 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, $19.7 million would impact the Companys 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 $1.4 million, net of federal tax benefits.
The Company is generally open to audit by the Internal Revenue Service under the statute of limitations for fiscal years 2005 through 2008. The Companys state income tax returns are generally open to audit under the various statutes of limitations for fiscal years 2004 through 2008. 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: Recently Issued Accounting Standards
In April 2009, three FASB Staff Positions were issued. FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly addresses determining fair values in inactive markets. FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of Other-Than-Temporary Impairments addresses other-than-temporary impairments for debt securities. FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments requires interim disclosures about fair value of financial instruments. All three FSPs are effective for the Company beginning May 3, 2009. The Company does not believe that adoption of these FSPs will have a material impact on its consolidated financial statements.
In June 2008, the FASB issued FSP No. EITF 03-6-1 Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (EITF 03-6-1), which classifies unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities and requires them to be included in the computation of earnings per share pursuant to the two-class method described in SFAS No. 128. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The adoption of EITF 03-6-1 did not have a material effect on the Companys consolidated financial statements.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
We have reviewed the accompanying condensed consolidated balance sheets of Ross Stores, Inc. and subsidiaries (the Company) as of May 2, 2009 and May 3, 2008, and the related condensed consolidated statements of earnings and cash flows for the three-month periods then ended. These condensed consolidated financial statements are the responsibility of the Companys management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance
sheet of Ross Stores, Inc. and subsidiaries as of January 31, 2009, and the
related consolidated statements of earnings, stockholders equity, and cash
flows for the year then ended (not presented herein), and in our report (which
includes an explanatory paragraph regarding the adoption of a new accounting
standard) dated March 26, 2009, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of January 31, 2009, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This section and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A (Risk Factors) below. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for 2008. All information is based on our fiscal calendar.
We are the second largest off-price apparel and home goods retailer in the United States. As of May 2, 2009, we operated 922 Ross Dress for Less (Ross) locations in 27 states and Guam, and 52 dds 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% off department and specialty store regular prices. dds 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% off moderate department and discount store regular prices.
Our primary objective is to pursue and refine our existing off-price strategies to drive gains in profitability and improved 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 the five largest off-price retailers in the United States increased 3% during 2008 on top of a 6% increase in 2007. This compares to total national apparel sales which declined 4% during 2008 compared to a 4% increase in 2007, according to data published by the NPD Group, 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 2008 reflected the increasing importance of value to consumers, especially as the recessionary headwinds accelerated. Our sales and earnings gains 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 the off-price industry as well as continued customer demand for name-brand fashions for the family and home at compelling everyday discounts.
We expect the macro-economic pressures to continue, and are planning to maintain tight controls of both inventory levels and operating expenses as part of our strategy to help us maximize our profitability.
Results of Operations
The following table summarizes the financial results for the three month periods ended May 2, 2009 and May 3, 2008:
Stores. Our expansion strategy is to open additional stores based on market penetration, local demographic characteristics, competition, expected store profitability, and the ability to leverage overhead expenses. We continually evaluate opportunistic real estate acquisitions and opportunities for potential new store locations. We also evaluate our current store locations and determine store closures based on similar criteria.
Sales. Sales for the three month period ended May 2, 2009 increased $135 million, or 8.7%, compared to the three month period ended May 3, 2008, due to the addition of 56 net new stores opened between May 3, 2008 and May 2, 2009 and an increase in comparable store sales (defined as stores that have been open for more than 14 complete months). For the three month period ended May 2, 2009, comparable store sales grew 3% on top of a 3% increase for the three month period ended May 3, 2008.
Our sales mix is shown below for the three month periods ended May 2, 2009 and May 3, 2008:
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 for the three month period ended May 2, 2009, we cannot be sure that they will result in a continuation of sales growth or in an increase in net earnings.
Cost of goods sold. Cost of goods sold for the three month period ended May 2, 2009 increased $87.2 million compared to the same period in the prior year mainly due to increased sales from the opening of 56 net new stores between May 3, 2008 and May 2, 2009 and an increase in comparable store sales.
Cost of goods sold as a percentage of sales for the three month period ended May 2, 2009 decreased approximately 90 basis points from the same period in the prior year. This improvement was driven primarily by a 65 basis point increase in merchandise gross margin, a 65 basis point reduction in freight costs, and occupancy expense that levered by about 20 basis points. These improvements were partially offset by a 55 basis point increase in buying and incentive costs and a 5 basis point increase in distribution expenses.
We cannot be sure that the gross profit margins realized for the three month period ended May 2, 2009 will continue in the future.
Selling, general and administrative expenses. For the three month period ended May 2, 2009, selling, general and administrative expenses increased $24.4 million compared to the same period in the prior year, mainly due to increased store operating costs reflecting the opening of 56 net new stores between May 3, 2008 and May 2, 2009.
Selling, general and administrative expenses as a percentage of sales for the three month period ended May 2, 2009 grew by approximately 15 basis points over the same period in the prior year. This increase was primarily the result of the 30 basis point benefit in the prior years first quarter related to a gain recognized from a lease settlement. Without that benefit, the first three months of 2009 had a combined 15 basis point decrease in store operating and general and administrative costs as a percent of sales versus the prior year period.
Interest expense (income), net. Net interest expense increased for the three month period ended May 2, 2009 by approximately $3.3 million compared to the same period in the prior year primarily due to lower interest rates on cash and investments.
Taxes on earnings. Our effective tax rate for the three month periods ended May 2, 2009 and May 3, 2008 was approximately 39% and 38%, 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 result of tax positions with various taxing authorities. We anticipate that our effective tax rate for fiscal 2009 will be in the range of 38% to 40%.
Earnings per share. Diluted earnings per share for the three month period ended May 2, 2009 were $0.72 compared to $0.60 in the prior year period. The 20% increase in diluted earnings per share is attributable to a 15% increase in net earnings and a 5% reduction in weighted average diluted shares outstanding primarily due to the repurchase of common stock under our stock repurchase program.
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, 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.
Net cash provided by operating activities was $240.7 million for the three month period ended May 2, 2009 compared to $160.8 million for the three month period ended May 3, 2008. The primary source of cash provided by operating activities for the three month periods ended May 2, 2009 and May 3, 2008 was accounts payable and net earnings plus non-cash expenses for depreciation and amortization. The increase in cash flow from operating activities for the three month period ended May 2, 2009 primarily resulted from an increase in accounts payable leverage as a result of faster inventory turns. Accounts payable leverage (defined as accounts payable divided by merchandise inventory) was 61% as of January 31, 2009 and increased to 74% as of May 2, 2009. Accounts payable leverage was 64% as of May 3, 2008.
Working capital (defined as current assets less current liabilities) was $418.4 million as of May 2, 2009, compared to $418.7 million as of May 3, 2008. 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.
During the three month periods ended May 2, 2009 and May 3, 2008, our capital expenditures were approximately $33.9 million and $42.3 million, respectively. Our capital expenditures included fixtures and leasehold improvements to open new stores, implement information technology systems, build or expand distribution centers and install material handling equipment and related distribution center systems, and various other expenditures related to our stores, buying, and corporate offices. We opened 19 and 28 new stores on a gross basis during the three month periods ended May 2, 2009 and May 3, 2008, respectively.
We are forecasting approximately $190 million in capital requirements in fiscal year 2009 to fund expenditures for fixtures and leasehold improvements to open new Ross and dds 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 cash flows from operations.
During the three month periods ended May 2, 2009 and May 3, 2008, 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 $600.0 million stock repurchase program for fiscal 2008 and 2009. We repurchased 2.2 million shares of common stock for an aggregate purchase price of approximately $77.2 million during the three month period ended May 2, 2009. We repurchased 2.5 million shares of common stock for approximately $77.2 million during the three month period ended May 3, 2008.
For the three month periods ended May 2, 2009 and May 3, 2008, dividends paid were $14.0 million and $12.5 million, respectively.
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 2009.
Our $600 million credit facility remains in place and available as of May 2, 2009 and expires in July 2011.
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.
The table below presents our significant contractual obligations as of May 2, 2009:
1Pursuant to the guidelines of FIN 48, a $26.5 million reserve for unrecognized tax benefits is included in other long-term liabilities on our condensed consolidated balance sheet. These obligations are excluded from the schedule above as the timing of payments cannot be reasonably estimated.
Senior notes. We have a Note Purchase Agreement with various institutional investors for $150 million of unsecured, senior notes. The notes were issued in two series and funding occurred in December 2006. 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.
Borrowings under these notes are subject to certain operating and financial covenants, including maintaining certain interest coverage and other financial ratios. As of May 2, 2009, we were in compliance with these covenants.
Capital leases. The obligations under capital leases relate to distribution center equipment and have a term of two 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 $3.9 million at the end of the respective initial lease terms, which is included in Other synthetic lease obligations in the table above.
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 2010 and 2014 and contain renewal provisions.
We lease approximately 161,000 and 15,000 square feet of office space for our New York City and Los Angeles buying offices, respectively. The lease terms for these facilities expire in 2015 and 2011, respectively. The lease term for the New York office contains a renewal provision.
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. Our contractual obligation of $56 million is included in Other synthetic lease obligations in the above table.
In accordance with Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, we have recognized a liability and corresponding asset for the fair value of the residual value guarantee in the amount of $8.3 million for the Perris, California distribution center and $1.2 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 condensed consolidated balance sheets.
In November 2001 we entered into a nine year lease for a 239,000 square foot warehouse and a ten-year lease for a 246,000 square foot warehouse, both in Carlisle, Pennsylvania. In January 2009, we exercised a three-year lease option for a 253,000 square foot warehouse in Fort Mill, South Carolina, extending the lease 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 these agreements may vary depending on actual interest coverage ratios achieved. As of May 2, 2009 we were in compliance with these covenants.
Purchase obligations. As of May 2, 2009 we had purchase obligations of $1,044.2 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 $1,011.4 million are purchase obligations of less than one year as of May 2, 2009.
Commercial Credit Facilities
The table below presents our significant available commercial credit facilities at May 2, 2009:
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 $227.7 million was available at May 2, 2009. 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 May 2, 2009 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 $72.3 million and $58.8 million in standby letters of credit outstanding at May 2, 2009 and May 3, 2008, respectively.
Trade letters of credit. We had $25.3 million and $19.8 million in trade letters of credit outstanding at May 2, 2009 and May 3, 2008, respectively.
Dividends. In May 2009, our Board of Directors declared a cash dividend of $.11 per common share, payable on June 30, 2009. Our Board of Directors declared quarterly cash dividends of $.11 per common share in January 2009, and $.095 per common share in January, May, August, and November 2008.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and on various other factors that management believes to be reasonable. We believe the following critical accounting policies describe the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.
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.
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 analysis, we determined that no long-lived asset impairment charges were required for the three month periods ended May 2, 2009 and May 3, 2008.
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 Condensed 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 account for stock-based compensation under the provisions of SFAS No. 123(R). Stock-based compensation awards consist principally of restricted stock and performance restricted stock and are expensed over the service or performance periods of the awards.
Income Taxes. FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), 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 companys consolidated financial statements. FIN 48 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.
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 managements judgment in their application. There are also areas in which managements judgment in selecting one alternative accounting principle over another would not produce a materially different result.
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.
In April 2009, three FASB Staff Positions were issued. FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly addresses determining fair values in inactive markets. FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of Other-Than-Temporary Impairments addresses other-than-temporary impairments for debt securities. FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments requires interim disclosures about fair value of financial instruments. All three FSPs are effective for us beginning May 3, 2009. We do not believe that adoption of these FSPs will have a material impact on our consolidated financial statements.
In June 2008, the FASB issued FSP No. EITF 03-6-1 Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (EITF 03-6-1), which classifies unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) as participating securities and requires them to be included in the computation of earnings per share pursuant to the two-class method described in SFAS No. 128. EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The adoption of EITF 03-6-1 did not have a material effect on our consolidated financial statements.
This report 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 these forward-looking statements and our expectations and projections. Refer to Part II, Item 1A in this Quarterly Report on Form 10-Q for a more complete discussion of risk factors. The factors underlying our forecasts are dynamic and subject to change. As a result, any forecasts or forward-looking statements speak only as of the date they are given and do not necessarily reflect our outlook at any other point in time. We disclaim any obligation to update or revise these forward-looking statements.
Other risk factors are detailed in our filings with the Securities and Exchange Commission including, without limitation, our Annual Report on Form 10-K for 2008.
Item 3. 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 material outstanding forward contracts as of May 2, 2009.
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 May 2, 2009, 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 May 2, 2009 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 three month period ended May 2, 2009. 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.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.
Quarterly Evaluation of Changes in Internal Control Over Financial Reporting
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any change occurred during the first fiscal quarter of 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our management concluded that there was no such change during the first fiscal quarter.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The matters under the caption Provision for litigation costs and other legal proceedings in Note A of Notes to Condensed Consolidated Financial Statements are incorporated herein by reference.
Item 1A. Risk Factors
Our Quarterly Report on Form 10-Q for our first fiscal quarter of 2009, and information we provide in our 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 risks and uncertainties that could cause our actual results to differ materially from those forward-looking statements and our prior expectations and projections. Refer to Managements 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 dds 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:
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:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information regarding shares of common stock we repurchased during the first quarter of 2009 is as follows:
1 We acquired 116,711 shares during the quarter ended May 2, 2009 related to income tax withholdings for restricted stock. All remaining shares were repurchased under our publicly announced stock repurchase program.
2 In January 2008 our Board of Directors approved a two-year $600 million stock repurchase program for fiscal 2008 and 2009.
Item 6. Exhibits
Incorporated herein by reference to the list of Exhibits contained in the Exhibit Index within this Report.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
INDEX TO EXHIBITS