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Ross Stores 10-Q 2011
rossstores_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark one)
 
               
    X       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the quarterly period ended April 30, 2011
     
or
     
            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from ________ to ________
     
    Commission file number: 0-14678
     
Ross Stores, Inc.
(Exact name of registrant as specified in its charter) 
 
Delaware          94-1390387
(State or other jurisdiction of incorporation or   (I.R.S. Employer Identification No.)
organization)    
 
4440 Rosewood Drive, Pleasanton, California   94588-3050
(Address of principal executive offices)   (Zip Code)
 
Registrant's telephone number, including area code   (925) 965-4400
 
Former name, former address and former fiscal year, if   N/A
changed since last report.    
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    X      No         
 
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    X      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 19, 2011 was 116,956,306.

1
 

 

PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
Condensed Consolidated Statements of Earnings
 
  Three Months Ended
  April 30,      May 1,
($000, except stores and per share data, unaudited) 2011   2010
Sales $  2,074,576   $  1,934,778
           
Costs and Expenses          
     Costs of goods sold   1,481,206     1,406,082
     Selling, general and administrative   309,160     294,472
     Interest expense, net   2,495     2,388
          Total costs and expenses   1,792,861     1,702,942
           
Earnings before taxes   281,715     231,836
Provision for taxes on earnings   108,742     89,489
Net earnings $ 172,973   $ 142,347
           
Earnings per share          
     Basic $ 1.51   $ 1.19
     Diluted $ 1.48   $ 1.16
           
           
Weighted average shares outstanding (000)          
     Basic   114,764     119,829
     Diluted   116,773     122,332
           
           
Dividends          
     Cash dividends declared per share $ -   $ -
            
           
Stores open at end of period   1,068     1,021
           
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
2
 

 

Condensed Consolidated Balance Sheets
 
  April 30,   January 29,   May 1,
($000, unaudited) 2011      2011      2010
Assets                      
Current Assets                      
     Cash and cash equivalents  $ 671,005      $ 833,924      $ 823,652  
     Short-term investments   3,275       3,204       1,941  
     Accounts receivable   61,683       45,384       54,268  
     Merchandise inventory    1,172,716       1,086,917       908,065  
     Prepaid expenses and other   72,900       63,807       67,895  
     Current deferred income taxes, net   15,662       10,003       3,923  
          Total current assets   1,997,241        2,043,239        1,859,744  
Property and Equipment                      
     Land and buildings   241,184       241,138       240,381  
     Fixtures and equipment   1,281,902       1,258,707       1,205,234  
     Leasehold improvements   595,050       584,306       541,906  
     Construction-in-progress   85,609       69,237       21,345  
          Property at cost   2,203,745       2,153,388       2,008,866  
     Less accumulated depreciation and amortization   1,198,071       1,169,612       1,075,212  
          Property and equipment, net   1,005,674       983,776       933,654  
Long-term investments   12,191       14,082       15,857  
Other long-term assets   86,888       75,107       73,352  
Total assets $ 3,101,994     $ 3,116,204     $ 2,882,607  
Liabilities and Stockholders’ Equity                      
Current Liabilities                      
     Accounts payable $ 742,600     $ 767,455     $ 748,779  
     Accrued expenses and other   265,586       292,174       231,927  
     Accrued payroll and benefits   141,268       235,030       148,913  
     Income taxes payable   89,340       57,661       99,932  
          Total current liabilities   1,238,794       1,352,320       1,229,551  
Long-term debt   150,000       150,000       150,000  
Other long-term liabilities   200,575       189,989       185,375  
Long-term deferred income taxes, net   106,519       91,203       88,328  
Commitments and contingencies                      
Stockholders’ Equity                      
     Common stock   1,171       1,181       1,223  
     Additional paid-in capital   759,048       740,726       704,982  
     Treasury stock   (59,245 )     (46,408 )     (43,640 )
     Accumulated other comprehensive income   485       488       198  
     Retained earnings   704,647       636,705       566,590  
Total stockholders’ equity   1,406,106       1,332,692       1,229,353  
Total liabilities and stockholders’ equity $ 3,101,994     $ 3,116,204     $ 2,882,607  
                       
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
3
 

 

Condensed Consolidated Statements of Cash Flows
 
  Three Months Ended
  April 30,   May 1,
($000, unaudited) 2011      2010
Cash Flows From Operating Activities              
Net earnings $ 172,973     $ 142,347  
Adjustments to reconcile net earnings to net cash provided              
by operating activities:              
     Depreciation and amortization   39,934       39,844  
     Stock-based compensation   9,894       8,910  
     Deferred income taxes   9,657       (14,772 )
     Tax benefit from equity issuance   10,021       6,810  
     Excess tax benefit from stock-based compensation   (9,727 )     (6,482 )
     Change in assets and liabilities:              
          Merchandise inventory   (85,799 )     (35,567 )
          Other current assets   (25,392 )     (19,311 )
          Accounts payable   1,120       110,149  
          Other current liabilities   (80,429 )     (43,557 )
          Other long-term, net   (1,201 )     810  
          Net cash provided by operating activities   41,051       189,181  
Cash Flows From Investing Activities              
Additions to property and equipment   (70,096 )     (35,519 )
Proceeds from investments   1,814       848  
          Net cash used in investing activities   (68,282 )     (34,671 )
Cash Flows From Financing Activities              
Excess tax benefit from stock-based compensation   9,727       6,482  
Proceeds from issuance of common stock related to stock plans   5,827       15,004  
Treasury stock purchased   (12,837 )     (6,776 )
Repurchase of common stock   (112,500 )     (94,298 )
Dividends paid   (25,905 )     (19,613 )
          Net cash used in financing activities   (135,688 )     (99,201 )
Net (decrease) increase in cash and cash equivalents    (162,919 )     55,309  
Cash and cash equivalents:              
          Beginning of period   833,924       768,343  
          End of period  $ 671,005      $  823,652  
Supplemental Cash Flow Disclosures              
Interest paid $ -     $ -  
Income taxes paid $ 54,705     $ 47,250  
Non-Cash Investing Activities              
(Decrease) increase in fair value of investment securities $ (4 )   $ 44  
               
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
4
 

 

Notes to Condensed Consolidated Financial Statements
 
Three months ended April 30, 2011 and May 1, 2010
(Unaudited)
 
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 Company’s financial position as of April 30, 2011 and May 1, 2010, and the results of operations and cash flows for the three month periods then ended. The Condensed Consolidated Balance Sheet as of January 29, 2011, presented herein, has been derived from the Company’s 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 29, 2011. 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 Company’s Annual Report on Form 10-K for the year ended January 29, 2011.
 
The results of operations for the three month periods ended April 30, 2011 and May 1, 2010 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 April 30, 2011 and May 1, 2010 are as follows (in $000):
 
    Three Months Ended  
     April 30, 2011        May 1, 2010   
  Net earnings $  172,973     $  142,347  
  Change in unrealized (loss) gain on investments, net of taxes   (3 )     28  
  Total comprehensive income $ 172,970     $ 142,375  
                 
 
Estimated fair value of financial instruments. The carrying value of cash and cash equivalents, short- and long-term investments, accounts receivable, other long-term assets, accounts payable, and other long-term liabilities approximates their estimated fair value.
 
Sales Mix. The Company’s sales mix is shown below for the three month periods ended April 30, 2011 and May 1, 2010:
 
      Three Months Ended  
         April 30, 2011      May 1, 2010   
   Ladies   31%   31%  
  Home accents and bed and bath   24%   23%  
  Shoes   14%   13%  
  Accessories, lingerie, fine jewelry, and fragrances   12%   12%  
  Men's   11%   12%  
  Children's   8%   9%  
  Total>   100%   100%   
             
 
5
 

 

Dividends. Dividends included in the Condensed Consolidated Statements of Cash Flows reflect dividends paid during the periods shown. Dividends per share reported on the Condensed Consolidated Statements of Earnings reflect dividends declared during the periods shown. In January 2011 the Company’s Board of Directors declared a quarterly cash dividend of $.22 per common share that was paid in March 2011. In January 2010 the Company’s Board of Directors declared a quarterly cash dividend of $.16 per common share that was paid in March 2010.
 
In May 2011, the Company’s Board of Directors declared a cash dividend of $.22 per common share, payable on June 30, 2011.
 
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. The Company’s gift cards do not have expiration dates. Based upon historical redemption rates, a small percentage of gift cards will never be redeemed, which represents breakage. The Company recognizes income from gift card breakage as a reduction of operating expenses when redemption by a customer is considered to be remote. Income recognized from breakage was not significant for the three month periods ended April 30, 2011 and May 1, 2010. Sales tax collected is not recognized as revenue and is included in accrued expenses and other.
 
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 store managers and assistant store managers at Company stores under state law, remains pending as of April 30, 2011.
 
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, the resolution of pending class action litigation and other currently pending legal proceedings is not expected to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
 
Note B: Investments
 
The amortized cost and fair value of the Company’s available-for-sale securities as of April 30, 2011 were:
 
      Amortized   Unrealized   Unrealized                      
   ($000)      cost      gains      losses      Fair value         Short-term      Long-term   
  Corporate securities   $ 7,170   $ 608   $ (33 )   $ 7,745     $  -   $ 7,745  
  U.S. Government and agency                                          
  securities     6,589     80     -       6,669       2,809     3,860  
  Mortgage-backed securities     961     91     -       1,052       466     586  
  Total   $  14,720   $  779   $  (33 )   $  15,466     $  3,275   $  12,191  
                                             

6
 

 

The amortized cost and fair value of the Company’s available-for-sale securities as of January 29, 2011 were:
 
      Amortized   Unrealized   Unrealized                      
  ($000)      cost      gains      losses      Fair value       Short-term      Long-term  
   Corporate securities   $ 7,465   $ 634           $ (37 )   $ 8,062     $ 300   $ 7,762   
  U.S. government and agency                                          
  securities     7,959     77     (5 )     8,031       2,366     5,665  
  Mortgage-backed securities     1,111     82     -       1,193       538     655  
  Total   $  16,535   $  793   $  (42 )   $  17,286     $  3,204   $  14,082  
                                             

The amortized cost and fair value of the Company’s available-for-sale securities as of May 1, 2010 were:
 
      Amortized   Unrealized   Unrealized                      
   ($000)      cost      gains      losses      Fair value       Short-term      Long-term   
  Auction-rate securities   $ 1,050   $ -   $ (150 )   $ 900     $  -   $ 900  
  Corporate securities     9,352     583     (54 )     9,881       1,016     8,865  
  U.S. Government and agency                                          
  securities     5,243     31     (178 )     5,096       353     4,743  
  Mortgage-backed securities     1,849     75     (3 )     1,921       572     1,349  
  Total   $  17,494   $  689   $  (385 )   $  17,798     $  1,941   $  15,857  
                                             

Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. 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. 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.
 
Assets measured at fair value at April 30, 2011 are summarized below:
 
            Fair Value Measurements at Reporting Date  
            Quoted              
            prices in              
            active   Significant        
            markets for   other   Significant  
            identical   observable   unobservable  
       April 30,   assets   inputs   inputs  
  ($000)      2011      (Level 1)      (Level 2)      (Level 3)   
  Corporate securities   $ 7,745   $ -   $ 7,745   $ -  
  U.S. Government and agency securities     6,669     6,669     -     -  
  Mortgage-backed securities     1,052     -     1,052           -  
  Total assets measured at fair value   $  15,466   $  6,669   $  8,797   $  -  
                             

7
 

 

Assets measured at fair value at January 29, 2011 are summarized below:
 
                
            Fair Value Measurements at Reporting Date   
            Quoted              
            prices in              
            active   Significant        
            markets for   other   Significant  
            identical   observable   unobservable  
           January 29,       assets       inputs       inputs   
  ($000)   2011   (Level 1)   (Level 2)   (Level 3)  
  Corporate securities   $ 8,062   $ -   $ 8,062   $       -  
  U.S. government and agency securities     8,031     8,031     -     -  
  Mortgage-backed securities     1,193     -     1,193     -  
  Total assets measured at fair value        $  17,286   $  8,031   $  9,255   $ -  
                             
 
Assets measured at fair value at May 1, 2010 are summarized below:
 
                 
            Fair Value Measurements at Reporting Date  
            Quoted              
            prices in              
            active   Significant        
            markets for   other   Significant  
            identical   observable   unobservable  
          May 1,       assets       inputs       inputs  
   ($000)   2010   (Level 1)   (Level 2)   (Level 3)   
  Auction-rate securities   $ 900   $ -   $ -   $ 900  
  Corporate securities     9,881     -     9,881     -  
  U.S. Government and agency securities     5,096     5,096     -     -  
  Mortgage-backed securities     1,921     -     1,921     -  
  Total assets measured at fair value   $  17,798   $  5,096   $  11,802   $  900  
                             
 
The maturities of investment securities at April 30, 2011 were:
 
               
            Estimated  
  ($000)       Cost basis       fair value  
   Maturing in one year or less   3,212   3,275   
  Maturing after one year through five years     5,070     5,408  
  Maturing after five years through ten years     6,438     6,783  
      14,720   15,466  
                 
 
The underlying assets in the Company’s non-qualified deferred compensation program totaling $72.7 million as of April 30, 2011 (included in other long-term assets and in other long-term liabilities) primarily consist of participant directed money market, stable value, stock, and bond funds. The fair value measurement for funds with quoted market prices in active markets (Level 1) totaled $62.9 million as of April 30, 2011. The fair value measurement for funds without quoted market prices in active markets (Level 2) totaled $9.8 million as of April 30, 2011. Fair market value for these Level 2 funds is considered to be the sum of participant funds invested under a group annuity contract plus accrued interest.
 
8
 

 

Note C: Stock-Based Compensation
 
Stock-based compensation. For the three month periods ended April 30, 2011 and May 1, 2010, the Company recognized stock-based compensation expense as follows:
 
         
      Three Months Ended  
      April 30,   May 1,  
   ($000)       2011       2010   
  Performance awards   4,074   3,286  
  Restricted stock     5,478     4,979  
  Employee stock purchase plan and stock options     342     645  
  Total   9,894   8,910  
                 

Total stock-based compensation recognized in the Company’s Condensed Consolidated Statements of Earnings for the three month periods ended April 30, 2011 and May 1, 2010 is as follows:
 
       
    Three Months Ended   
     April 30,       May 1,  
  Statements of Earnings Classification ($000) 2011   2010  
  Cost of goods sold 4,529   4,094  
  Selling, general and administrative   5,365     4,816  
  Total 9,894   8,910  
               

Restricted stock. The Company grants restricted shares to directors, officers and key employees. The market value of restricted shares at the date of grant is amortized to expense ratably over the vesting period of generally three to five years.
 
During the quarter ended April 30, 2011, shares purchased by the Company for tax withholding totaled approximately 183,000 shares and are considered treasury shares which are available for reissuance. As of April 30, 2011, shares subject to repurchase related to unvested restricted stock totaled 2.8 million shares.
 
               
            Weighted  
            average  
      Number of   grant date  
   (000, except per share data)       shares       fair value   
  Unvested at January 29, 2011   2,835     $  36.99  
       Awarded   600       60.90  
       Released   (594 )     34.03  
       Forfeited   -       -  
  Unvested at April 30, 2011            2,841     $  42.66  
                 

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 Company’s attainment of a profitability-based performance goal during a performance period. If attained, the common stock then issued vests over the service period, generally three years from the date the performance award was granted.
 
The unamortized compensation expense for all plans at April 30, 2011 and May 1, 2010 was $80.0 million and $75.8 million, respectively, which is expected to be recognized over a weighted-average remaining period of 2.4 years.
 
9
 

 

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 Company’s 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). The Company recognizes expense for ESPP purchase rights equal to the value of the 15% discount given on the purchase date.
 
Stock option activity. The following table summarizes stock option activity for the three month period ended April 30, 2011:
 
 
                              Weighted             
            Weighted   average      
            average   remaining   Aggregate  
       Number of     exercise   contractual   intrinsic
  (000, except per share data)   shares     price   term   value
  Outstanding at January 29, 2011   1,609     25.53            
       Granted   -       -            
       Exercised   (171 )     22.66            
       Forfeited   (2 )     19.54            
                           
  Outstanding at April 30, 2011, all vested   1,436     25.88   3.34   68,658  
                         

No stock options were granted during the three month periods ended April 30, 2011 and May 1, 2010.
 
10
 

 

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 April 30, 2011 (number of shares in thousands):
 
 
               Options outstanding       Options exercisable   
            Number       Remaining       Exercise   Number       Exercise
Exercise price range   of shares   life   price   of shares   price
  11.71    to    24.47   466   1.97   20.77   466   20.77  
    24.54 to   27.81   404   4.16     27.04   404     27.04  
    27.84 to   29.42   475   3.63     28.84   475     28.84  
    29.60 to   32.85   91   5.25     31.41   91     31.41  
  11.71 to 32.85   1,436   3.34   25.88   1,436   25.88  
 

11
 

 

Note D: Earnings Per Share
 
Basic Earnings Per Share (“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.
 
For the three month period ended April 30, 2011 no shares were anti-dilutive. For the three month period ended May 1, 2010, approximately 82,400 weighted average shares were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive in the period presented.
 
The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations:
 
       
    Three Months Ended  
              Effect of              
          dilutive          
          common          
    Basic   stock     Diluted  
  Shares in (000s) EPS   equivalents     EPS  
  April 30, 2011                    
       Shares   114,764      2,009       116,773  
       Amount $ 1.51   $ (0.03 )   $ 1.48  
                       
  May 1, 2010                    
       Shares    119,829     2,503        122,332  
       Amount $ 1.19   $ (0.03 )   $ 1.16  
                       

Note E: Debt
 
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 April 30, 2011 of approximately $173 million is estimated by obtaining comparable market quotes. The senior notes are subject to prepayment penalties for early payment of principal.
 
In March 2011, the Company entered into a new $600 million unsecured, revolving credit facility. This credit facility, which replaced the Company’s previous $600 million revolving credit facility, expires in March 2016 and contains a $300 million sublimit for issuance of standby letters of credit, of which $219.4 million was available at April 30, 2011. Interest on this facility is based on LIBOR plus an applicable margin (currently 150 basis points) and is payable upon maturity but not less than quarterly. The Company had no borrowings outstanding under this facility as of April 30, 2011.
 
Borrowings under the credit facility and the senior notes are subject to certain covenants, including 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 April 30, 2011, the Company was in compliance with these covenants.
 
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Note F: Taxes on Earnings
 
As of April 30, 2011 and May 1, 2010, the reserves for unrecognized tax benefits (net of federal tax benefits) were $44.5 million and $35.4 million inclusive of $12.5 million and $10.8 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, $37.7 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 $1.3 million.
 
The Company is generally open to audit by the Internal Revenue Service under the statute of limitations for fiscal years 2007 through 2010. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years 2006 through 2010. 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: Warehouse Purchase
 
In April 2011, the Company purchased a 449,000 square foot warehouse for packaway storage in Riverside, California for $20.5 million.
 
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Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Stockholders of
Ross Stores, Inc.
Pleasanton, California
 
We have reviewed the accompanying condensed consolidated balance sheets of Ross Stores, Inc. and subsidiaries (the “Company”) as of April 30, 2011 and May 1, 2010, and the related condensed consolidated statements of earnings and cash flows for the three-month periods then ended. These condensed consolidated interim financial statements are the responsibility of the Company’s 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 29, 2011, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 29, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 29, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
 
/s/Deloitte & Touche LLP
 
San Francisco, California
June 8, 2011
 
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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 2010. All information is based on our fiscal calendar.
 
Overview
 
We are the second largest off-price apparel and home goods retailer in the United States. As of April 30, 2011, we operated 998 Ross Dress for Less® (“Ross”) locations in 27 states and Guam, and 70 dd’s DISCOUNTS® stores in six 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.
 
Results of Operations
 
The following table summarizes the financial results for the three month periods ended April 30, 2011 and May 1, 2010:
 
          
    Three Months Ended  
    April 30, 2011       May 1, 2010  
  Sales            
       Sales (millions) $ 2,075   $ 1,935  
       Sales growth   7.2%     14.4%  
       Comparable store sales growth   3%     10%  
               
  Costs and expenses (as a percent of sales)            
       Cost of goods sold    71.4%      72.7%  
       Selling, general and administrative   14.9%     15.2%  
       Interest expense, net   0.1%     0.1%  
               
  Earnings before taxes (as a percent of sales)   13.6%     12.0%  
               
  Net earnings (as a percent of sales)   8.3%     7.4%  
               

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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.
 
         
    Three Months Ended  
      April 30, 2011         May 1, 2010    
  Stores at the beginning of the period 1,055     1,005    
  Stores opened in the period 16     17    
  Stores closed in the period (3 )   (1 )  
  Stores at the end of the period 1,068     1,021    
               

Sales. Sales for the three month period ended April 30, 2011 increased $139.8 million, or 7%, compared to the three month period ended May 1, 2010, due to the opening of 47 net new stores between May 1, 2010 and April 30, 2011 and a 3% increase in “comparable” store sales (defined as stores that have been open for more than 14 complete months).
 
Our sales mix is shown below for the three month periods ended April 30, 2011 and May 1, 2010:
 
       
    Three Months Ended  
      April 30, 2011       May 1, 2010  
  Ladies 31%   31%  
  Home accents and bed and bath 24%   23%  
  Shoes 14%   13%  
  Accessories, lingerie, fine jewelry, and fragrances 12%   12%  
  Men's 11%   12%  
  Children's 8%   9%  
  Total 100%   100%  
           

We intend 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 processes 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 April 30, 2011, 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 April 30, 2011 increased $75.1 million compared to the same period in the prior year mainly due to increased sales from the opening of 47 net new stores between May 1, 2010 and April 30, 2011 and a 3% increase in comparable store sales.
 
Cost of goods sold as a percentage of sales for the three month period ended April 30, 2011 decreased approximately 130 basis points from the same period in the prior year. This improvement was driven primarily by a 95 basis point increase in merchandise gross margin, which included a 15 basis point benefit from a lower shortage accrual. In addition, occupancy expense improved by approximately 25 basis points, distribution costs declined by about 20 basis points, and buying and incentive costs decreased by approximately 15 basis points compared to the prior year period. These favorable trends were partially offset by a 25 basis point increase in freight costs.
 
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We cannot be sure that the gross profit margins realized for the three month period ended April 30, 2011 will continue in the future.
 
Selling, general and administrative expenses. For the three month period ended April 30, 2011, selling, general and administrative expenses increased $14.7 million compared to the same period in the prior year, mainly due to increased store operating costs reflecting the opening of 47 net new stores between May 1, 2010 and April 30, 2011.
 
Selling, general and administrative expenses as a percentage of sales for the three month period ended April 30, 2011 decreased by approximately 30 basis points over the same period in the prior year primarily due to leverage on both store operating costs and general and administrative expenses from increases in comparable store sales.
 
Interest expense, net. Net interest expense increased for the three month period ended April 30, 2011 by approximately $0.1 million compared to the same period in the prior year primarily due to lower investment income.
 
Taxes on earnings. Our effective tax rate for the three month periods ended April 30, 2011 and May 1, 2010 was approximately 39%, 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 2011 will be approximately 38%.
 
Earnings per share. Diluted earnings per share for the three month period ended April 30, 2011 was $1.48 compared to $1.16 in the prior year period. The 28% increase in diluted earnings per share is attributable to a 22% increase in net earnings and a 5% reduction in weighted average diluted shares outstanding largely due to the stock buyback program.
 
Financial Condition
 
Liquidity and Capital Resources
 
Our primary sources of funds for our business activities are existing cash balances, cash flows from operations, and short-term trade credit. Our primary ongoing cash requirements are for merchandise inventory purchases, payroll, rent, taxes, 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 buyback program and to pay dividends.
 
         
      Three Months Ended  
  ($000)   April 30, 2011         May 1, 2010    
  Cash flows provided by operating activities   $ 41,051     $  189,181    
  Cash flows used in investing activities     (68,282 )     (34,671 )  
  Cash flows used in financing activities     (135,688 )     (99,201 )  
  Net (decrease) increase in cash and cash equivalents   $  (162,919 )   $ 55,309    
                     

Operating Activities
 
Net cash provided by operating activities was $41.1 million for the three month period ended April 30, 2011 compared to $189.2 million for the three month period ended May 1, 2010. The primary sources of cash provided by operating activities for the three month periods ended April 30, 2011 and May 1, 2010 were net earnings plus non-cash expenses for depreciation and amortization. Our primary source of operating cash flow 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.
 
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The decrease in cash flow from operating activities for the three month period ended April 30, 2011, compared to the prior year, was primarily due to cash used to purchase additional packaway inventory.
 
Packaway merchandise is purchased with the intent that it will be stored in our warehouses until a later date. The aging of packaway varies by merchandise category and seasonality of purchase, but typically packaway remains in storage less than a semi-annual selling season.
 
We expect to continue to take advantage of packaway inventory opportunities to deliver bargains to our customers. As a regular part of our business, packaway inventory levels will vary over time based on availability of compelling opportunities in the marketplace. Changes in packaway inventory levels impact our operating cash flow. At the end of the 2011 first quarter, packaway inventory increased to 48% of total inventory from 47% at the end of fiscal 2010. At the end of the 2010 first quarter, packaway inventory decreased to 33% of inventory from 38% at the end of fiscal 2009.
 
We do not believe that fluctuations in our packaway inventory levels will have a material impact on our overall liquidity.
 
Accounts payable leverage (defined as accounts payable divided by merchandise inventory) decreased from 71% as of January 29, 2011 to 63% as of April 30, 2011 as a result of higher packaway inventory.
 
The change in total merchandise inventory, net of the related change in accounts payable, resulted in a use of cash of approximately $85 million for the three months ended April 30, 2011 compared to a source of cash of approximately $75 million for the three months ended May 1, 2010.
 
Investing Activities
 
Our capital expenditures were approximately $70.1 million and $35.5 million, for the three month periods ended April 30, 2011 and May 1, 2010, respectively. Our capital expenditures included costs of fixtures and leasehold improvements to open new stores and costs to implement information technology systems, build or expand distribution centers, and various other expenditures related to our stores, buying, and corporate offices. We opened 16 and 17 new stores during the three month periods ended April 30, 2011 and May 1, 2010, respectively.
 
In April 2011, we purchased a 449,000 square foot warehouse for packaway storage in Riverside, California for $20.5 million.
 
We are forecasting approximately $380 million to $390 million in capital expenditures in fiscal year 2011 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 and cash flows from operations.
 
Financing Activities
 
For the three month periods ended April 30, 2011 and May 1, 2010, our liquidity and capital requirements were provided by available cash and cash flows from operations. 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 two warehouse facilities, one in Fort Mill, South Carolina and the other in Riverside, California.
 
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In January 2011, our Board of Directors approved a new two-year $900 million stock repurchase program for fiscal 2011 and 2012, replacing the $375 million remaining under the prior two-year $750 million stock repurchase program approved in January 2010. We repurchased 1.6 million shares of common stock for an aggregate purchase price of approximately $112.5 million during the three month period ended April 30, 2011. We repurchased 1.8 million shares of common stock for approximately $94.3 million during the three month period ended May 1, 2010.
 
For the three month periods ended April 30, 2011 and May 1, 2010, we paid dividends of $25.9 million and $19.6 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 2011.
 
In March 2011 we entered into a new $600 million unsecured, revolving credit facility. This credit facility, which replaced our previous $600 million revolving credit facility, expires in March 2016. Interest on this facility is based on LIBOR plus an applicable margin (currently 150 basis points) and is payable upon maturity but not less than quarterly. As of April 30, 2011, our $600 million credit facility remains in place and available.
 
We estimate that existing cash balances, cash flows from operations, bank credit lines, and trade credit are adequate to meet our operating cash needs and to fund our planned capital investments, common stock repurchases, and quarterly dividend payments for at least the next twelve months.
 
Contractual Obligations
 
The table below presents our significant contractual obligations as of April 30, 2011:
 
                                 
    Less than       1 - 3       3 - 5       After 5            
  ($000) One Year   Years   Years   Years   Total¹  
  Senior notes $ -   $ -   $ -   $ 150,000   $ 150,000  
  Interest payment obligations   9,667     19,335     19,335     40,528     88,865  
  Operating leases:                              
       Rent obligations   352,233     691,156     487,291     453,358     1,984,038  
       Synthetic leases   5,291     4,941     -     -     10,232  
       Other synthetic lease obligations   1,322     56,499     -     -     57,821  
  Purchase obligations   1,376,478     7,453     -     -     1,383,931  
  Total contractual obligations $  1,744,991   $  779,384   $  506,626   $  643,886   $  3,674,887  
                                 

1We have a $44.5 million liability for unrecognized tax benefits that is included in other long-term liabilities on our interim condensed 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 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.
 
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Borrowings under these notes are subject to certain operating and financial covenants, including interest coverage and other financial ratios. As of April 30, 2011, we were in compliance with these covenants.

Off-Balance Sheet Arrangements
 
Operating leases. We lease our 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 $1.8 million at the end of the respective initial lease terms, which is included in Other synthetic lease obligations in the table above.
 
We lease a 1.3 million square foot distribution center in Perris, California. The land and building for this distribution center are financed by the lessor 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. As of April 30, 2011, we have accrued approximately $4.6 million related to an estimated shortfall in the residual value guarantee recorded in accrued expenses and other in the accompanying consolidated balance sheets. The synthetic lease 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 also recognized a liability and corresponding asset for the inception date estimated fair values of the distribution center and POS synthetic lease residual value guarantees. As of April 30, 2011, we have approximately $2.2 million of residual value guarantee asset and liability. 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 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.
 
We lease three warehouses. Two of the warehouses are in Carlisle, Pennsylvania with leases expiring in 2013 and 2014. The third warehouse is in Fort Mill, South Carolina, with a lease expiring in 2013. We also own a 423,000 square foot warehouse in Fort Mill, South Carolina and a 449,000 square foot warehouse in Riverside, California. All five of these warehouses are used to store our packaway inventory. We also lease a 10-acre parcel that has been developed for trailer parking adjacent to our Perris distribution center.
 
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 2014 and 2015 and contain renewal provisions.
 
We lease approximately 201,000 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.
 
Purchase obligations. As of April 30, 2011 we had purchase obligations of approximately $1,384 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 $1,317 million represent purchase obligations of less than one year as of April 30, 2011.
 
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Commercial Credit Facilities
 
The table below presents our significant available commercial credit facilities at April 30, 2011:
 
               
      Amount of Commitment Expiration Per Period        
      Less than 1                                     Total amount  
  ($000)   year   1 - 3 years   3 - 5 years   After 5 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 E of Notes to Condensed Consolidated Financial Statements.  
     

Revolving credit facility. In March 2011 we entered into a new $600 million unsecured, revolving credit facility replacing our previous $600 million revolving credit facility. This new facility with our banks, expires in March 2016 and contains a $300 million sublimit for issuance of standby letters of credit, of which $219.4 million was available at April 30, 2011. Interest on this facility is based on LIBOR plus an applicable margin (currently 150 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 April 30, 2011 we had no borrowings outstanding under this facility and were in compliance with the covenants.

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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 April 30, 2011 we were in compliance with these covenants.
 
Standby letters of credit. We use standby letters of credit to collateralize certain self-insured obligations. We had $80.6 million and $83.3 million in standby letters of credit outstanding at April 30, 2011 and May 1, 2010, respectively.
 
Trade letters of credit. We had $41.3 million and $40.1 million in trade letters of credit outstanding at April 30, 2011 and May 1, 2010, respectively.
 
Dividends. In May 2011, our Board of Directors declared a cash dividend of $.22 per common share, payable on June 30, 2011.
 
Critical Accounting Policies
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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. Actual results may differ significantly from these estimates. During the first quarter of fiscal 2011, there have been no significant changes to the policies discussed in our Annual Report on Form 10-K for the year ended January 29, 2011.
 
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.
 
Forward-Looking 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 those forward-looking statements and our previous 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 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 disclaim any obligation to update or revise these forward-looking statements.
 
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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 2010.
 
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 outstanding forward contracts as of April 30, 2011.
 
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 April 30, 2011, 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 April 30, 2011 was $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 materially impact 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 April 30, 2011. 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. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. 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 2011 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
 
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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 2011, 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 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. 
  • The impact from the macro-economic environment and financial and credit markets including but not limited to interest rates, recession, inflation, deflation, energy costs, tax rates and policy, unemployment trends, and fluctuating commodity costs. 
  • 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.
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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. 
  • 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Information regarding shares of common stock we repurchased during the first quarter of fiscal 2011 is as follows:
 
                      Maximum number (or    
                  Total number of   approximate dollar    
        Total         shares (or units)   value) of shares (or    
        number of   Average   purchased as part   units) that may yet be    
        shares (or   price paid   of publicly   purchased under the    
            units)       per share       announced plans or       plans or programs    
    Period   purchased1   (or unit)   programs   ($000)2    
    February   520,779         $ 70.68   518,136                         $  863,400    
    (1/30/2011-2/26/2011)                        
       
    March   639,444   $ 70.13   557,740   $ 824,100    
    (2/27/2011-4/2/2011)                        
       
    April   609,005   $ 71.73   509,997   $ 787,500    
    (4/3/2011-4/30/2011)                        
       
    Total   1,769,228   $ 70.84   1,585,873   $ 787,500    
                             

1We purchased 183,355 of these shares during the quarter ended April 30, 2011 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.
 
2In January 2011 our Board of Directors approved a new two-year $900 million stock repurchase program for fiscal 2011 and 2012.
 
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ITEM 6. EXHIBITS
 
Incorporated herein by reference to the list of exhibits contained in the Index to Exhibits within this Report.
 
26
 

 

SIGNATURES
 
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.
 
ROSS STORES, INC.
(Registrant)

     Date:     June 8, 2011 By:   /s/ J. Call
      John G. Call
      Senior Vice President, Chief Financial Officer and
      Principal Accounting Officer

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INDEX TO EXHIBITS
 
Exhibit    
Number       Exhibit
    3.1   Amendment of Certificate of Incorporation dated May 21, 2004 and Amendment of Certificate of Incorporation dated June 5, 2002 and Corrected First Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Form 10-Q filed by Ross Stores for its quarter ended July 31, 2004.
       
  3.2   Amended By-laws, dated August 25, 1994, incorporated by reference to Exhibit 3.2 to the Form 10-Q filed by Ross Stores for its quarter ended July 30, 1994.
       
  10.1   Revolving Credit Agreement dated March 3, 2011.
       
  10.2   Forms of Executive Employment Agreement between Ross Stores, Inc. and Executives.
       
  10.3   Executive Employment Agreement effective March 16, 2011 between Barbara Rentler and Ross Stores, Inc.
       
  10.4   Executive Employment Agreement effective March 16, 2011 between James Fassio and Ross Stores, Inc.
       
  10.5   Executive Employment Agreement effective March 16, 2011 between Michael O’Sullivan and Ross Stores, Inc.
       
  10.6   Executive Employment Agreement effective March 16, 2011 between John Call and Ross Stores, Inc.
       
  10.7   Third Amended and Restated Ross Stores, Inc. Non-Qualified Deferred Compensation Plan effective December 31, 2008.
       
  15   Letter re: Unaudited Interim Financial Information from Deloitte & Touche LLP dated June 8, 2011.
       
  31.1   Certification of Chief Executive Officer Pursuant to Sarbanes-Oxley Act Section 302(a).
       
  31.2   Certification of Chief Financial Officer Pursuant to Sarbanes-Oxley Act Section 302(a).
       
  32.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
       
  32.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
   
  101.INS¹   XBRL Instance Document
       
  101.SCH¹   XBRL Taxonomy Extension Schema
       
  101.CAL¹   XBRL Taxonomy Extension Calculation Linkbase
       
  101.DEF¹   XBRL Taxonomy Extension Definition Linkbase
       
  101.LAB¹   XBRL Taxonomy Extension Label Linkbase
       
  101.PRE¹   XBRL Taxonomy Extension Presentation Linkbase
       
  ¹Furnished, not filed.

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