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Ross Stores 10-Q 2011
ross_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 July 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 August 18, 2011 was 115,598,812.

1
 

 

PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
Condensed Consolidated Statements of Earnings
 
        Three Months Ended       Six Months Ended
    July 30,       July 31,   July 30,       July 31,
($000, except stores and per share data, unaudited)     2011     2010     2011     2010
Sales   $  2,089,410   $  1,911,760   $  4,163,986   $  3,846,538
 
Costs and Expenses                        
       Costs of goods sold     1,524,307     1,395,785     3,005,513     2,801,867
       Selling, general and administrative     320,885     303,402     630,045     597,874
       Interest expense, net     2,569     2,436     5,064     4,824
              Total costs and expenses     1,847,761     1,701,623     3,640,622     3,404,565
 
Earnings before taxes     241,649     210,137     523,364     441,973
Provision for taxes on earnings     93,373     80,861     202,115     170,350
Net earnings   $ 148,276   $ 129,276   $ 321,249   $ 271,623
 
Earnings per share                        
       Basic   $ 1.30   $ 1.09   $ 2.81   $ 2.28
       Diluted   $ 1.28   $ 1.07   $ 2.76   $ 2.24
 
Weighted average shares outstanding (000)                        
       Basic     113,652     118,615     114,208     119,222
       Diluted     115,588     120,562     116,204     121,243
 
Dividends                        
       Cash dividends declared per share   $ 0.22   $ 0.16   $ 0.22   $ 0.16
 
Stores open at end of period     1,091     1,036     1,091     1,036
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

2
 

 
 
Condensed Consolidated Balance Sheets
 
      July 30,     January 29,       July 31,  
($000, unaudited)         2011           2011           2010  
Assets                        
Current Assets                        
       Cash and cash equivalents   $ 512,716     $ 833,924     $ 772,671  
       Short-term investments     959       3,204       2,491  
       Accounts receivable     57,943       45,384       53,079  
       Merchandise inventory      1,189,523        1,086,917       915,704  
       Prepaid expenses and other     93,358       63,807       66,653  
       Current deferred income taxes, net     15,363       10,003       4,249  
              Total current assets     1,869,862       2,043,239        1,814,847  
 
Property and Equipment                        
       Land and buildings     261,937       241,138       240,706  
       Fixtures and equipment     1,299,867       1,258,707       1,221,915  
       Leasehold improvements     608,895       584,306       548,813  
       Construction-in-progress     102,051       69,237       41,143  
              Property at cost     2,272,750       2,153,388       2,052,577  
       Less accumulated depreciation and amortization     1,230,071       1,169,612       1,107,242  
              Property and equipment, net     1,042,679       983,776       945,335  
 
Long-term investments     6,243       14,082       18,535  
Other long-term assets     136,491       75,107       72,146  
Total assets   $ 3,055,275     $ 3,116,204     $ 2,850,863  
 
Liabilities and Stockholders’ Equity                        
Current Liabilities                        
       Accounts payable   $ 709,143     $ 767,455     $ 745,461  
       Accrued expenses and other     270,636       292,174       244,460  
       Accrued payroll and benefits     184,952       235,030       181,611  
       Income taxes payable     -       57,661       8,070  
              Total current liabilities     1,164,731       1,352,320       1,179,602  
 
Long-term debt     150,000       150,000       150,000  
Other long-term liabilities     198,234       189,989       184,324  
Long-term deferred income taxes, net     116,381       91,203       80,088  
 
Commitments and contingencies                        
 
Stockholders’ Equity                        
       Common stock     1,158       1,181       1,207  
       Additional paid-in capital     767,907       740,726       713,750  
       Treasury stock     (60,565 )     (46,408 )     (44,306 )
       Accumulated other comprehensive income     571       488       562  
       Retained earnings     716,858       636,705       585,636  
Total stockholders’ equity     1,425,929       1,332,692       1,256,849  
Total liabilities and stockholders’ equity   $ 3,055,275     $ 3,116,204     $ 2,850,863  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.    
 
3
 

 
 
Condensed Consolidated Statements of Cash Flows
 
        Six Months Ended
      July 30,           July 31,  
($000, unaudited)     2011       2010  
Cash Flows From Operating Activities                
Net earnings   $ 321,249     $ 271,623  
Adjustments to reconcile net earnings to net cash provided                
by operating activities:                
       Depreciation and amortization     77,416       80,161  
       Stock-based compensation     19,280       18,253  
       Deferred income taxes     19,818       (23,337 )
       Tax benefit from equity issuance     12,336       8,801  
       Excess tax benefit from stock-based compensation     (11,829 )     (8,597 )
       Change in assets and liabilities:                
              Merchandise inventory      (102,606 )     (43,206 )
              Other current assets     (22,264 )     (16,880 )
              Accounts payable          (32,338 )     106,831  
              Other current liabilities     (119,906 )     (89,771 )
              Other long-term, net     509       959  
              Net cash provided by operating activities     161,665       304,837  
 
Cash Flows From Investing Activities                
Additions to property and equipment     (145,720 )     (88,122 )
Increase in restricted cash and investments     (73,465 )     -  
Purchases of investments     -       (6,842 )
Proceeds from investments     10,168       5,020  
              Net cash used in investing activities     (209,017 )     (89,944 )
 
Cash Flows From Financing Activities                
Excess tax benefit from stock-based compensation     11,829       8,597  
Proceeds from issuance of common stock related to stock plans     10,322       20,366  
Treasury stock purchased     (14,157 )     (7,442 )
Repurchase of common stock     (230,227 )     (192,982 )
Dividends paid     (51,623 )     (39,104 )
              Net cash used in financing activities     (273,856 )      (210,565 )
 
Net (decrease) increase in cash and cash equivalents     (321,208 )     4,328  
 
Cash and cash equivalents:                
              Beginning of period     833,924       768,343  
              End of period   $ 512,716     $ 772,671  
 
Supplemental Cash Flow Disclosures                
Interest paid   $ 4,834     $ 4,834  
Income taxes paid   $ 225,265     $ 225,628  
 
Non-Cash Investing Activities                
Increase in fair value of investment securities   $ 128     $ 604  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.    
 
4
 

 

Notes to Condensed Consolidated Financial Statements
 
Three and Six Months Ended July 30, 2011 and July 31, 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 July 30, 2011 and July 31, 2010, the results of operations for the three and six month periods ended July 30, 2011 and July 31, 2010, and cash flows for the six month periods ended July 30, 2011 and July 31, 2010. 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 and six month periods ended July 30, 2011 and July 31, 2010 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.
 
Restricted cash, cash equivalents, and investments. In July 2011, the Company transferred $73.5 million of cash, cash equivalents, and investments into restricted accounts to serve as collateral for the Company’s insurance obligations, which were previously secured by unsecured letters of credit. These restricted funds are invested in bank deposits, money market mutual funds, U.S. Government and agency securities, and corporate securities and cannot be withdrawn from the Company’s account without the prior written consent of the secured parties. As of July 30, 2011, the Company had cash and cash equivalents of $67.0 million and investments of $6.5 million in restricted accounts. As of July 30, 2011 restricted cash, cash equivalents, and investments of $19.8 million and $53.7 million were included in other current assets and other long-term assets, respectively, in the Condensed Consolidated Balance Sheet. The categorization between current and long-term is based on the timing of expected payments of the secured insurance obligations.
 
Total comprehensive income. The components of total comprehensive income for the three and six month periods ended July 30, 2011 and July 31, 2010 are as follows (in $000):
 
          Three Months Ended     Six Months Ended  
        July 30,         July 31,         July 30,         July 31,   
         2011     2010     2011     2010  
  Net earnings   $  148,276   $  129,276   $ 321,249   $  271,623  
  Increase in unrealized gain on investments,                          
  net of taxes     86     364     83     392  
         Total comprehensive income   $ 148,362   $ 129,640   $ 321,332   $ 272,015  
                             

Estimated fair value of financial instruments. The carrying value of cash and cash equivalents, short- and long-term investments, restricted cash and cash equivalents, restricted investments, accounts receivable, other long-term assets, accounts payable, and other long-term liabilities approximates their estimated fair value. Cash and cash equivalents were $512.7 million, $833.9 million, and $772.7 million at July 30, 2011, January 29, 2011, and July 31, 2010, respectively, and include money market funds for which the fair value was determined using quoted prices for identical assets in active markets, which are considered to be Level 1 inputs under the fair value measurements and disclosures guidance.
 
5
 

 

Sales Mix. The Company’s sales mix is shown below for the three and six month periods ended July 30, 2011 and July 31, 2010:
 
           Three Months Ended   Six Months Ended  
      July 30,       July 31,       July 30,       July 31,   
      2011   2010   2011   2010  
  Ladies          31 %          32 %          31 %         32 %  
  Home accents and bed and bath   24 %   24 %   24 %   24 %  
  Shoes   13 %   12 %   13 %   13 %  
  Men's   13 %   13 %   12 %   12 %  
  Accessories, lingerie, fine jewelry, and fragrances   12 %   11 %   12 %   11 %  
  Children's   7 %   8 %   8 %   8 %  
  Total   100 %   100 %   100 %   100 %  
                             

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 and May 2011 the Company’s Board of Directors declared a quarterly cash dividend of $.22 per common share that was paid in March and June 2011, respectively. In January, May, August, and November 2010, the Company’s Board of Directors declared a quarterly cash dividend of $.16 per common share that was paid in March, June, September, and December 2010, respectively.
 
In August 2011, the Company’s Board of Directors declared a cash dividend of $.22 per common share, payable on September 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 and six month periods ended July 30, 2011 and July 31, 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 July 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.
 
6
 

 

Note B: Investments and Restricted Investments
 
The amortized cost and fair value of the Company’s available-for-sale securities as of July 30, 2011 were:
 
  ($000)   Amortized   Unrealized   Unrealized                         
  Investments     cost     gains     losses         Fair value       Short-term     Long-term  
  Corporate securities   $ 5,818   $ 532   $  (52 )   $ 6,298     $ 622   $ 5,676  
  Mortgage-backed securities     858     46     -       904       337     567  
  Total investments     6,676     578     (52 )     7,202       959     6,243  
                                             
  Restricted Investments                                          
  Corporate securities     1,355     117     -       1,472       -     1,472  
  U.S. government and agency                                          
  securities     4,782     237     -       5,019       1,004     4,015  
  Total restricted investments     6,137     354     -       6,491       1,004     5,487  
                                              
  Total   $  12,813   $ 932   $ (52 )   $  13,693     $  1,963   $  11,730  
                                             

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 July 31, 2010 were:
 
      Amortized   Unrealized   Unrealized                         
  ($000)       cost       gains       losses         Fair value     Short-term       Long-term  
  Corporate securities       $ 8,157       $ 681       $  (54 )       $ 8,784       $  1,009       $ 7,775  
  U.S. Government and agency                                          
  securities     10,572     174     (2 )     10,744       352     10,392  
  Mortgage-backed securities     1,433     65     -       1,498       1,130     368  
  Total   $  20,162   $  920   $ (56 )   $ 21,026     $ 2,491   $  18,535  
                                             

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.
 
7
 

 

Investments and restricted investments measured at fair value at July 30, 2011 are summarized below:
 
              
            Fair Value Measurements at Reporting Date   
                Quoted                      
            prices in              
            active   Significant        
            markets for   other   Significant  
            identical   observable   unobservable  
  ($000)   July 30,   assets   inputs   inputs  
  Investments   2011   (Level 1)   (Level 2)   (Level 3)  
  Corporate securities   6,298    $ -   6,298   $       -  
  Mortgage-backed securities     904     -     904     -  
  Total investments      7,202     -     7,202     -  
                             
  Restricted Investments                          
  Corporate securities     1,472     -     1,472     -  
  U.S. government and agency securities     5,019     5,019     -     -  
  Total restricted investments     6,491     5,019     1,472     -  
                             
  Total   $ 13,693   $  5,019   8,674   $       -  
                             
 
Investments 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   $  17,286   $ 8,031   $ 9,255   $       -  
                             
 
8
 

 

Investments measured at fair value at July 31, 2010 are summarized below:
 
                          
            Fair Value Measurements at Reporting Date   
            Quoted                      
            prices in              
            active   Significant        
            markets for   other   Significant  
            identical   observable   unobservable  
      July 31,   assets   inputs   inputs  
  ($000)   2010   (Level 1)   (Level 2)   (Level 3)  
  Corporate securities   $ 8,784   $ -   $ 8,784   $       -  
  U.S. Government and agency securities     10,744     10,744     -     -  
  Mortgage-backed securities     1,498     -     1,498     -  
  Total   $  21,026   $  10,744   $  10,282   $       -  
                             
 
The maturities of investment securities at July 30, 2011 were:
 
                       
    Investments   Restricted Investments
          Estimated         Estimated
($000)       Cost basis       fair value       Cost basis       fair value
Maturing in one year or less   $ 915   $ 959   $       1,002   $  1,004
Maturing after one year through five years            3,183               3,277     1,499         1,622
Maturing after five years through ten years     2,578     2,966     3,636     3,865
    $  6,676   $  7,202   $ 6,137   $ 6,491
                         

The underlying assets in the Company’s non-qualified deferred compensation program totaling $69.0 million as of July 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 $59.3 million as of July 30, 2011. The fair value measurement for funds without quoted market prices in active markets (Level 2) totaled $9.7 million as of July 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.
 
9
 

 

Note C: Stock-Based Compensation
 
Stock-based compensation. For the three and six month periods ended July 30, 2011 and July 31, 2010, the Company recognized stock-based compensation expense as follows:
 
         
    Three Months Ended   Six Months Ended
    July 30,   July 31,   July 30,   July 31,
($000)       2011       2010       2011       2010
Restricted stock         $  4,957     $  5,743   $  10,434   $  10,723
Performance awards     4,068     2,966     8,142     6,252
ESPP and stock options     361     634     704     1,278
Total   $ 9,386   $ 9,343   $ 19,280   $ 18,253
                         

Total stock-based compensation recognized in the Company’s Condensed Consolidated Statements of Earnings for the three and six month periods ended July 30, 2011 and July 31, 2010 is as follows:
 
         
    Three Months Ended   Six Months Ended
    July 30,   July 31,   July 30,   July 31,
Statements of Earnings Classification ($000)       2011       2010       2011       2010
Cost of goods sold   $  3,628   $ 4,124   $ 8,156   $ 8,218
Selling, general and administrative     5,758     5,219     11,124     10,035
Total     $ 9,386        $  9,343   $  19,280   $  18,253
                         

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 July 30, 2011, shares purchased by the Company for tax withholding totaled approximately 200,000 shares and are considered treasury shares which are available for reissuance. As of July 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   739       64.43
       Released   (647 )     34.16
       Forfeited   (84 )     40.30
 
Unvested at July 30, 2011   2,843     $ 44.67
             

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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 July 30, 2011, January 29, 2011, and July 31, 2010 was $80.3 million, $56.8 million and $69.9 million, respectively, which is expected to be recognized over a weighted-average remaining period of 2.3 years.
 
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 six month period ended July 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   (279 )     22.72          
       Forfeited   (3 )     21.95          
 
Outstanding at July 30, 2011, all vested   1,327     $ 26.13   3.16   $ 65,893
                       

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 July 30, 2011 (number of shares in thousands):
 
                         
                  Options outstanding and exercisable
                  Number   Remaining   Exercise
Exercise price range         of shares       life       price
$  14.78     to        $  24.47     415   1.84       $  21.27
   24.54   to     27.81     375   3.95     27.07
   27.84   to     29.18     342   3.63     28.64
   29.19   to     32.85     195   3.63     30.21
$  14.78   to   $ 32.85     1,327   3.16   $ 26.13
                             

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. 
 
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For the three and six month periods ended July 30, 2011, approximately 400 and 41,000 weighted average shares were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive in the period presented. For the three and six month periods ended July 31, 2010, approximately 400 and 600 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   Six Months Ended  
                 Effect of                             Effect of                 
            Dilutive                   Dilutive            
            Common                        Common            
      Basic   Stock     Diluted   Basic   Stock     Diluted  
  Shares in (000s)   EPS   Equivalents     EPS    EPS   Equivalents     EPS  
  July 30, 2011                                              
       Shares      113,652      1,936        115,588       114,208      1,996       116,204  
       Amount   $ 1.30   $ (0.02 )   $ 1.28      2.81   $ (0.05 )   2.76  
                                     
  July 31, 2010                                              
       Shares     118,615     1,947       120,562       119,222     2,021       121,243  
       Amount   $ 1.09   $ (0.02 )   $ 1.07     $ 2.28   $ (0.04 )   $ 2.24  
                                                 

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 July 30, 2011 of approximately $180 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. 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 or letters of credit issued under this facility as of July 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 July 30, 2011, the Company was in compliance with these covenants.
 
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Note F: Taxes on Earnings
 
As of July 30, 2011 and July 31, 2010, the reserves for unrecognized tax benefits (net of federal tax benefits) were $46.6 million and $36.5 million inclusive of $13.3 million and $11.0 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, $39.9 million would impact the Company’s effective tax rate. The difference between the total amount of unrecognized tax benefits and the amounts that would impact the effective tax rate relates to amounts attributable to deferred income tax assets and liabilities. These amounts are net of federal and state income taxes.

During the next twelve months, it is reasonably possible that the statute of limitations may lapse pertaining to positions taken by the Company in prior year tax returns. If this occurs, the total amount of unrecognized tax benefits may decrease, reducing the provision for taxes on earnings by up to $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.
 
Note H: Recently Issued Accounting Standards
 
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” (“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures required for fair value measurements. ASU 2011-04 is to be applied prospectively and is effective for the Company in fiscal 2012. The Company believes the adoption of this guidance will not have a material impact on its consolidated financial statements.
 
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively and is effective for the Company in fiscal 2012. The Company believes the adoption of this guidance will not have a material impact on its consolidated financial position or results of operations.
 
13
 

 

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 July 30, 2011 and July 31, 2010, and the related condensed consolidated statements of earnings for the three-month and six-month periods ended July 30, 2011 and July 31, 2010, and of cash flows for the six-month periods ended July 30, 2011 and July 31, 2010. 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 interim 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
September 7, 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
 
Ross Stores, Inc. operates two chains -- Ross Dress for Less® (“Ross”) and dd's DISCOUNTS®. Ross is the largest off-price apparel and home fashion chain in the United States with 1,013 locations in 27 states and Guam. Ross offers first-quality, in-season, name brand and designer apparel, accessories, footwear and home fashions for the entire family at everyday savings of 20% to 60% off department and specialty store regular prices. We also operate 78 dd's DISCOUNTS locations in six states that feature a more moderately-priced assortment of first quality, in-season, name brand apparel, accessories, footwear and home fashions for the entire family at everyday savings of 20% to 70% off moderate department and discount store regular prices.
 
Results of Operations
 
The following table summarizes the financial results for the three and six month periods ended July 30, 2011 and July 31, 2010:
 
    Three Months Ended        Six Months Ended  
    July 30,          July 31,     July 30,          July 31,    
    2011     2010     2011     2010    
  Sales                                
       Sales (millions) $  2,089     $  1,912     $  4,164     $  3,847    
       Sales growth   9.3 %     8.1 %     8.3 %     11.2 %  
       Comparable store sales growth   5 %     4 %     4 %     7 %  
     
  Costs and expenses (as a percent of sales)                                
       Cost of goods sold   72.9 %     73.0 %     72.2 %     72.8 %  
       Selling, general and administrative   15.4 %     15.9 %     15.1 %     15.6 %  
       Interest expense, net   0.1 %     0.1 %     0.1 %     0.1 %  
     
  Earnings before taxes (as a percent of sales)   11.6 %     11.0 %     12.6 %     11.5 %  
     
  Net earnings (as a percent of sales)   7.1 %     6.8 %     7.7 %     7.1 %  
                                   

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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          Six Months Ended    
          July 30,           July 31,           July 30,          July 31,    
    2011     2010     2011     2010    
  Stores at the beginning of the period 1,068     1,021     1,055     1,005    
  Stores opened in the period 25     17     41     34    
  Stores closed in the period (2 )   (2 )   (5 )   (3 )  
  Stores at the end of the period 1,091     1,036     1,091     1,036    
                           

Sales. Sales for the three month period ended July 30, 2011 increased $177.6 million, or 9%, compared to the three month period ended July 31, 2010, due to the opening of 55 net new stores between July 31, 2010 and July 30, 2011 and a 5% increase in “comparable” store sales (defined as stores that have been open for more than 14 complete months) on top of a 4% gain in the prior year.
 
Sales for the six month period ended July 30, 2011 increased $317.4 million, or 8%, compared to the six month period ended July 31, 2010, due to the opening of 55 net new stores between July 31, 2010 and July 30, 2011 and an increase in comparable store sales of 4% on top of a 7% gain in the prior year.
 
Our sales mix is shown below for the three and six month periods ended July 30, 2011 and July 31, 2010:
 
               
    Three Months Ended        Six Months Ended  
    July 30,        July 31,   July 30,        July 31,  
    2011   2010   2011   2010  
  Ladies 31 %   32 %   31 %   32 %  
  Home accents and bed and bath 24 %   24 %   24 %   24 %  
  Shoes 13 %   12 %   13 %   13 %  
  Men's 13 %   13 %   12 %   12 %  
  Accessories, lingerie, fine jewelry, and fragrances 12 %   11 %   12 %   11 %  
  Children's 7 %   8 %   8 %   8 %  
  Total         100 %   100 %           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 and six month periods ended July 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 and six month periods ended July 30, 2011 increased $128.5 million and $203.6 million compared to the same period in the prior year mainly due to increased sales from the opening of 55 net new stores between July 31, 2010 and July 30, 2011 and a 5% and 4% increase in comparable store sales, respectively.
 
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Cost of goods sold as a percentage of sales for the three month period ended July 30, 2011 decreased approximately 5 basis points from the same period in the prior year. This improvement was driven primarily by a 45 basis point increase in merchandise gross margin mainly due to fewer markdowns resulting from above plan sales and faster inventory turns. The merchandise gross margin improvement includes a 15 basis point benefit from a lower shortage accrual. The quarter also benefited from 15 basis points of leverage on occupancy expenses. These favorable trends were partially offset by an increase of distribution expenses of about 45 basis points reflecting year-over-year timing differences in packaway-related processing costs and a 10 basis point increase in freight.
 
Cost of goods sold as a percentage of sales for the six month period ended July 30, 2011 decreased approximately 65 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 mainly due to fewer markdowns resulting from above plan sales and faster inventory turns. The merchandise gross margin improvement includes a 15 basis point benefit from a lower shortage accrual. In addition, occupancy expenses and buying and incentive costs levered by about 20 basis points and 5 basis points, respectively. These favorable trends were partially offset by both higher freight and distribution costs equal to approximately 15 basis points and 10 basis points, respectively.
 
We cannot be sure that the gross profit margins realized for the three and six month periods ended July 30, 2011 will continue in the future.
 
Selling, general and administrative expenses. For the three and six month periods ended July 30, 2011, selling, general and administrative expenses increased $17.5 million and $32.2 million, respectively, compared to the same period in the prior year, mainly due to increased store operating costs reflecting the opening of 55 net new stores between July 31, 2010 and July 30, 2011.
 
Selling, general and administrative expenses as a percentage of sales for the three month period ended July 30, 2011 decreased by approximately 50 basis points over the same period in the prior year due to leverage on both store operating costs and general and administrative expenses from increases in comparable store sales.
 
Selling, general and administrative expenses as a percentage of sales for the six month period ended July 30, 2011 decreased by approximately 40 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 remained flat for the three and six month periods ended July 30, 2011 compared to the same period in the prior year.
 
Taxes on earnings. Our effective tax rate for the three month periods ended July 30, 2011 and July 31, 2010 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. Our effective tax rate for the six month periods ended July 30, 2011 and July 31, 2010 was approximately 39%. 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 July 30, 2011 was $1.28 compared to $1.07 in the prior year period. The 20% increase in diluted earnings per share is attributable to a 15% increase in net earnings and a 4% reduction in weighted average diluted shares outstanding largely due to the repurchase of common stock under our stock repurchase program. Diluted earnings per share for the six month period ended July 30, 2011 was $2.76 compared to $2.24 in the prior year period. The 23% increase in diluted earnings per share is attributable to a 18% increase in net earnings and a 4% reduction in weighted average diluted shares outstanding largely due to the stock buyback program.
 
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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.
 
         
      Six Months Ended  
  ($000)       July 30, 2011       July 31, 2010  
  Cash flows provided by operating activities   $ 161,665         $ 304,837    
  Cash flows used in investing activities      (209,017 )     (89,944 )  
  Cash flows used in financing activities     (273,856 )      (210,565 )  
  Net (decrease) increase in cash and cash equivalents   $ (321,208 )   $ 4,328    
                     
 
Operating Activities
 
Net cash provided by operating activities was $161.7 million for the six month period ended July 30, 2011 compared to $304.8 million for the six month period ended July 31, 2010. The primary sources of cash provided by operating activities for the six month periods ended July 30, 2011 and July 31, 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.
 
The decrease in cash flow from operating activities for the six month period ended July 30, 2011, compared to the prior year, was primarily due to cash used to purchase additional packaway inventory. 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.
 
Packaway merchandise is purchased with the intent that it will be stored in our warehouses until a later date. The timing of the release of packaway inventory to our stores is principally driven by the product mix and seasonality of the merchandise, and its relation to the Company’s store merchandise assortment plans. As such, the aging of packaway varies by merchandise category and seasonality of purchase, but typically packaway remains in storage less than six months.
 
Changes in packaway inventory levels impact our operating cash flow. At the end of the 2011 second quarter, packaway inventory increased to 49% of total inventory from 47% at the end of fiscal 2010. At the end of the 2010 second quarter, packaway inventory decreased to 37% of inventory from 38% at the end of fiscal 2009. Packaway inventory as a percentage of our total inventory increased from the second quarter of 2010 to the second quarter of 2011 as we took advantage of the increased availability of compelling opportunities available in the marketplace.
 
The change in total merchandise inventory, net of the related change in accounts payable, resulted in a use of cash of approximately $135 million for the six months ended July 30, 2011 compared to a source of cash of approximately $64 million for the six months ended July 31, 2010.
 
Accounts payable leverage (defined as accounts payable divided by merchandise inventory) decreased to 60% as of July 30, 2011 from 71% as of January 29, 2011 as a result of higher packaway inventory.
   
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We believe that our existing cash balances, cash flows from operations, available bank credit lines and trade credit are adequate to meet our liquidity needs for at least the next twelve months.
 
Investing Activities >
 
The increase in cash used for investing activities for the six month period ended July 30, 2011, compared to the prior year, was primarily due to capital expenditures and a transfer of cash, cash equivalents, and investments into restricted accounts to serve as collateral for the Company’s insurance obligations.
 
Our capital expenditures were approximately $145.7 million and $88.1 million, for the six month periods ended July 30, 2011 and July 31, 2010, respectively. Our capital expenditures included costs for 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 41 and 34 new stores on a gross basis during the six month periods ended July 30, 2011 and July 31, 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 $305 million to $315 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 and equipment, for building distribution centers and implementing material handling equipment and related systems, and for various buying and corporate office expenditures. Our forecasted capital expenditures, as compared to our prior forecast, decreased for the year due to the deferral of certain distribution center related projects until 2012. We expect to fund these expenditures with available cash and cash flows from operations.
 
Financing Activities
 
For the six month periods ended July 30, 2011 and July 31, 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.
 
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 3.1 million shares of common stock for an aggregate purchase price of approximately $230.2 million during the six month period ended July 30, 2011. We repurchased 3.6 million shares of common stock for approximately $193 million during the six month period ended July 31, 2010.
 
For the six month periods ended July 30, 2011 and July 31, 2010, we paid dividends of $51.6 million and $39.1 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 July 30, 2011, our $600 million credit facility remains in place and available.
 
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We believe 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 July 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     35,694     84,031  
  Operating leases:                              
       Rent obligations   358,563     693,482     482,272     450,483     1,984,800  
       Synthetic leases   5,442     3,950     -     -     9,392  
       Other synthetic lease obligations   624     56,763     -     -     57,387  
  Purchase obligations   1,277,527     7,503     247     -     1,285,277  
  Total contractual obligations $  1,651,823   $  781,033   $  501,854   $  636,177   $  3,570,887  
                                 
                                 

1 We have a $46.6 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.
 
Borrowings under these notes are subject to certain operating and financial covenants, including interest coverage and other financial ratios. As of July 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 $1.4 million at the end of the respective initial lease terms, which is included in Other synthetic lease obligations in the table above.
 
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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 July 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 July 30, 2011, we have approximately $1.9 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, California 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 July 30, 2011 we had purchase obligations of approximately $1,285 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 $1,212 million represent purchase obligations of less than one year as of July 30, 2011.
 
Commercial Credit Facilities
 
The table below presents our significant available commercial credit facilities at July 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.  
     

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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. 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 July 30, 2011 we had no borrowings outstanding or letters of credits issued under this facility and were in compliance with the covenants.
 
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 July 30, 2011 we were in compliance with these covenants.
 
Standby letters of credit and collateral trust. In July 2011, we entered into new standby letters of credit outside of our revolving credit facility and set up a trust to collateralize our insurance obligations. As of July 30, 2011, we had $52.5 million in standby letters of credit outstanding which are collateralized by restricted cash and cash equivalents and $21.0 million in a collateral trust consisting of restricted cash, cash equivalents, and investments.
 
At July 31, 2010, we had $83.3 million in standby letters of credit outstanding issued under our revolving credit facility.
 
Trade letters of credit. We had $49.6 million and $47.3 million in trade letters of credit outstanding at July 30, 2011 and July 31, 2010, respectively.
 
Dividends. In August 2011, our Board of Directors declared a cash dividend of $.22 per common share, payable on September 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 second 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.
 
New Accounting Pronouncements
 
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” (“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures required for fair value measurements. ASU 2011-04 is to be applied prospectively and is effective for the Company in fiscal 2012. We believe adoption of this guidance will not have a material impact on our consolidated financial statements.
 
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In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively and is effective for the Company in fiscal 2012. We believe the adoption of this guidance will not have a material impact on our consolidated financial position or 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.
 
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 July 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 July 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 July 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 July 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.
 
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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 second 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 second 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 second 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.
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  • 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.
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.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Information regarding shares of common stock we repurchased during the second quarter of fiscal 2011 is as follows:
 
                    Maximum  
                Total number   number (or  
                of shares (or   approximate  
                units)   dollar value) of  
      Total         purchased as   shares (or units)  
      number of   Average   part of publicly   that may yet be  
      shares (or   price paid   announced   purchased under  
      units)   per share   plans or   the plans or  
  Period       purchased1       (or unit)       programs       programs ($000)2  
  May                      
  (5/1/2011-5/28/2011)   325,752   $  80.83   323,661   $  761,300  
  June                      
  (5/29/2011-7/2/2011)   687,386   $ 77.77   672,777   $ 709,000  
  July                      
  (7/3/2011-7/30/2011)   505,482   $ 77.67   505,200   $ 669,800  
  Total   1,518,620   $ 78.39   1,501,638   $ 669,800  
                         

1We purchased 16,982 of these shares during the quarter ended July 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.
 
ITEM 5. OTHER INFORMATION
 
Frequency of Stockholder Advisory Votes on Executive Compensation
 
At our May 18, 2011 Annual Meeting of Stockholders, we presented to our stockholders for an advisory vote a proposal relating to the frequency with which the Company will conduct future advisory stockholder votes on executive compensation (“Say on Pay”). A plurality of our stockholders voted in favor of conducting future Say on Pay advisory votes on an annual basis. The Company has since decided to follow this advisory vote and will conduct future Say on Pay votes annually, until the next time an advisory vote on the frequency for conducting Say on Pay votes is again presented to our stockholders.
 
ITEM 6. EXHIBITS
 
Incorporated herein by reference to the list of exhibits contained in the Index to Exhibits within this Report.
 
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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: September 7, 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 and Restated ByLaws, dated August 17, 2011, incorporated by reference to Exhibit 3.1 to the Form  8-K filed by Ross Stores, Inc. on August 23, 2011.
     
3.3  
Certificate of Amendment of the Certificate of Incorporation dated July 18, 2011.
     
10.1  
Sixth Amendment to the Employment Agreement effective June 1, 2011 between Michael Balmuth and Ross Stores, Inc.
     
10.2  
Form of Notice of Grant of Performance Shares and Performance Share Agreement under the Ross Stores, Inc. 2008 Equity Incentive Plan.
     
10.3  
Form of Notice of Grant of Performance Shares and Performance Share Agreement under the Ross Stores, Inc. 2008 Equity Incentive Plan between Michael Balmuth and Ross Stores, Inc.
     
15  
Letter re: Unaudited Interim Financial Information from Deloitte & Touche LLP dated September 7, 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.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

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