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Ross Stores 10-Q 2012
ROST-2012.10.27-10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
ý
   
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended October 27, 2012
 
 
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from __________ to __________
 
 
 
 
 
Commission file number: 0-14678
Ross Stores, Inc.
(Exact name of registrant as specified in its charter)
Delaware
    
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 ý No o
          
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 ý    No o
          
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 ý Accelerated filer o Non-accelerated filer o Smaller reporting company o
          
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý

The number of shares of Common Stock, with $.01 par value, outstanding on November 15, 2012 was 222,380,667.

1



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Statements of Earnings

 
Three Months Ended
 
Nine Months Ended
($000, except stores and per share data, unaudited)
October 27,
2012

 
October 29,
2011

 
October 27,
2012

 
October 29,
2011

Sales
$
2,262,723

 
$
2,046,427

 
$
6,960,419

 
$
6,210,413

 
 
 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
 
 
Costs of goods sold
1,648,997

 
1,490,213

 
5,017,767

 
4,495,726

Selling, general and administrative
357,983

 
332,226

 
1,047,883

 
962,271

Interest expense, net
1,643

 
2,565

 
5,961

 
7,629

Total costs and expenses
2,008,623

 
1,825,004

 
6,071,611

 
5,465,626

 
 
 
 
 
 
 
 
Earnings before taxes
254,100

 
221,423

 
888,808

 
744,787

Provision for taxes on earnings
94,576

 
77,454

 
338,647

 
279,569

Net earnings
$
159,524

 
$
143,969

 
$
550,161

 
$
465,218

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.73

 
$
0.64

 
$
2.50

 
$
2.05

Diluted
$
0.72

 
$
0.63

 
$
2.46

 
$
2.01

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding (000)
 
 
 
 
 
 
 
Basic
218,583

 
224,540

 
219,917

 
227,125

Diluted
222,185

 
228,460

 
223,596

 
231,105

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.14

 
$
0.11

 
$
0.28

 
$
0.22

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stores open at end of period
1,205

 
1,126

 
1,205

 
1,126

 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


2



Condensed Consolidated Statements of Comprehensive Income

 
Three Months Ended
 
Nine Months Ended
($000, unaudited)
October 27,
2012

 
October 29,
2011

 
October 27,
2012

 
October 29,
2011

Net earnings
$
159,524

 
$
143,969

 
$
550,161

 
$
465,218

 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Change in unrealized (loss) gain on investments, net of tax
(7
)
 
(36
)
 
9

 
47

Comprehensive income
$
159,517

 
$
143,933

 
$
550,170

 
$
465,265

 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

3



Condensed Consolidated Balance Sheets

($000, unaudited)
October 27,
2012

 
January 28,
2012

 
October 29,
2011

Assets
 
 
 
 
 
Current Assets
 
 
 
 
 
Cash and cash equivalents
$
623,822

 
$
649,835

 
$
552,924

Short-term investments
1,533

 
658

 
298

Accounts receivable
68,493

 
50,848

 
62,384

Merchandise inventory
1,342,904

 
1,130,070

 
1,233,616

Prepaid expenses and other
102,609

 
87,362

 
88,964

Deferred income taxes
11,509

 
5,598

 
19,914

Total current assets
2,150,870

 
1,924,371

 
1,958,100

 
 
 
 
 
 
Property and Equipment
 
 
 
 
 
Land and buildings
345,892

 
338,027

 
265,829

Fixtures and equipment
1,543,117

 
1,408,647

 
1,375,623

Leasehold improvements
712,672

 
657,312

 
628,202

Construction-in-progress
156,187

 
131,881

 
79,191

  
2,757,868

 
2,535,867

 
2,348,845

Less accumulated depreciation and amortization
1,405,702

 
1,294,145

 
1,260,601

Property and equipment, net
1,352,166

 
1,241,722

 
1,088,244

 
 
 
 
 
 
Long-term investments
4,397

 
5,602

 
5,984

Other long-term assets
140,504

 
129,514

 
129,616

Total assets
$
3,647,937

 
$
3,301,209

 
$
3,181,944

 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
Current Liabilities
 
 
 
 
 
Accounts payable
$
886,629

 
$
761,717

 
$
759,708

Accrued expenses and other
352,484

 
304,654

 
290,498

Accrued payroll and benefits
227,475

 
248,552

 
217,238

Income taxes payable

 
31,129

 
1,628

Total current liabilities
1,466,588

 
1,346,052

 
1,269,072

 
 
 
 
 
 
Long-term debt
150,000

 
150,000

 
150,000

Other long-term liabilities
223,477

 
203,625

 
204,105

Deferred income taxes
110,137

 
108,520

 
111,516

 
 
 
 
 
 
Commitments and contingencies


 


 


 
 
 
 
 
 
Stockholders’ Equity
 
 
 
 
 
Common stock
2,226

 
2,269

 
1,145

Additional paid-in capital
854,703

 
788,895

 
777,425

Treasury stock
(90,989
)
 
(62,262
)
 
(61,910
)
Accumulated other comprehensive income
644

 
635

 
535

Retained earnings
931,151

 
763,475

 
730,056

Total stockholders’ equity
1,697,735

 
1,493,012

 
1,447,251

Total liabilities and stockholders’ equity
$
3,647,937

 
$
3,301,209

 
$
3,181,944

 
 
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

4



Condensed Consolidated Statements of Cash Flows

 
Nine Months Ended
($000, unaudited)
October 27,
2012

 
October 29,
2011

Cash Flows From Operating Activities
 
 
 
Net earnings
$
550,161

 
$
465,218

Adjustments to reconcile net earnings to net cash provided
by operating activities
 
 
 
Depreciation and amortization
133,824

 
117,337

Stock-based compensation
37,380

 
30,411

Deferred income taxes
(4,294
)
 
10,402

Tax benefit from equity issuance
27,714

 
14,073

Excess tax benefit from stock-based compensation
(26,997
)
 
(13,362
)
Change in assets and liabilities:
 
 
 
Merchandise inventory
(212,834
)
 
(146,699
)
Other current assets
(32,340
)
 
(24,145
)
Accounts payable
156,763

 
18,227

Other current liabilities
6,628

 
(65,961
)
Other long-term, net
10,265

 
8,190

Net cash provided by operating activities
646,270

 
413,691

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Additions to property and equipment
(255,332
)
 
(231,349
)
Increase in restricted cash and investments
(2,012
)
 
(66,505
)
Purchases of investments
(424
)
 

Proceeds from investments
809

 
10,965

Net cash used in investing activities
(256,959
)
 
(286,889
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Excess tax benefit from stock-based compensation
26,997

 
13,362

Issuance of common stock related to stock plans
15,317

 
14,060

Treasury stock purchased
(28,727
)
 
(15,502
)
Repurchase of common stock
(334,357
)
 
(342,733
)
Dividends paid
(94,554
)
 
(76,989
)
Net cash used in financing activities
(415,324
)
 
(407,802
)
 
 
 
 
Net decrease in cash and cash equivalents
(26,013
)
 
(281,000
)
 
 
 
 
Cash and cash equivalents:
 
 
 
Beginning of period
649,835

 
833,924

End of period
$
623,822

 
$
552,924

 
 
 
 
Supplemental Cash Flow Disclosures
 
 
 
Interest paid
$
4,834

 
$
4,834

Income taxes paid
$
344,686

 
$
300,824

 
 
 
 
Non-Cash Investing Activities
 
 
 
Increase in fair value of investment securities
$
14

 
$
72

 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


5



Notes to Condensed Consolidated Financial Statements

Three and Nine Months Ended October 27, 2012 and October 29, 2011
(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 October 27, 2012 and October 29, 2011, the results of operations and comprehensive income for the three and nine month periods ended October 27, 2012 and October 29, 2011, and cash flows for the nine month periods ended October 27, 2012 and October 29, 2011. The Condensed Consolidated Balance Sheet as of January 28, 2012, 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 28, 2012. 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 28, 2012.

The results of operations and comprehensive income for the three and nine month periods ended October 27, 2012 and October 29, 2011 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

Stock dividend. On December 15, 2011 the Company issued a two-for-one stock split in the form of a 100 percent stock dividend. All share and per share amounts have been adjusted for the two-for-one stock split effective December 15, 2011.

Restricted cash, cash equivalents, and investments. The Company has restricted cash, cash equivalents, and investments that serve as collateral for certain insurance obligations of the Company. 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 October 27, 2012, the Company had total restricted cash, cash equivalents, and investments of $68.7 million of which $19.2 million and $49.5 million were included in prepaid expenses and other and other long-term assets, respectively, in the Condensed Consolidated Balance Sheet. As of January 28, 2012, the Company had total restricted cash, cash equivalents, and investments of $66.8 million of which $18.7 million and $48.1 million were included in prepaid expenses and other and other long-term assets, respectively, in the Condensed Consolidated Balance Sheet. As of October 29, 2011, the Company had total restricted cash, cash equivalents, and investments of $66.6 million of which $18.0 million and $48.6 million were included in prepaid expenses and other and other long-term assets, respectively, in the Condensed Consolidated Balance Sheet. The classification between current and long-term is based on the timing of expected payments of the secured insurance obligations.

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 $623.8 million, $649.8 million, and $552.9 million at October 27, 2012, January 28, 2012, and October 29, 2011, respectively, and include bank deposits and 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.


6



Sales Mix. The Company’s sales mix is shown below for the three and nine month periods ended October 27, 2012 and October 29, 2011:

 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
October 27,
2012

 
October 29,
2011

 
October 27,
2012

 
October 29,
2011

Ladies
29
%
 
29
%
 
30
%
 
31
%
Home accents and bed and bath
23
%
 
24
%
 
23
%
 
24
%
Accessories, lingerie, fine jewelry, and fragrances
14
%
 
13
%
 
13
%
 
12
%
Shoes
13
%
 
13
%
 
13
%
 
13
%
Men's
12
%
 
12
%
 
13
%
 
12
%
Children's
9
%
 
9
%
 
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, May, and August 2012, the Company’s Board of Directors declared a quarterly cash dividend of $0.14 per common share that was paid in March, June, and September 2012, respectively. In January, May, August, and November 2011, the Company’s Board of Directors declared a quarterly cash dividend of $0.11 per common share that was paid in March, June, September, and December 2011, respectively.

In November 2012, the Company’s Board of Directors declared a cash dividend of $0.14 per common share, payable on December 28, 2012.

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 nine month periods ended October 27, 2012 and October 29, 2011. Sales tax collected is not recognized as revenue and is included in accrued expenses and other until paid.

Provision for litigation costs and other legal proceedings. Like many California retailers, the Company has been named in class action lawsuits alleging violation of wage and hour and other employment laws. Class action litigation remains pending as of October 27, 2012.

The Company is also party to various other legal and regulatory proceedings arising in the normal course of business. Actions filed against the Company include commercial, product and product safety, customer, intellectual property, and labor and employment-related claims, including lawsuits in which private plaintiffs or governmental agencies 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.

7




Note B: Investments and Restricted Investments

The amortized cost and fair value of the Company’s available-for-sale securities as of October 27, 2012 were:
($000)
Amortized
cost

 
Unrealized
gains

 
Unrealized
losses

 
Fair value

 
 
Short-term

 
Long-term

Investments
 

 
 

 


 
 

 
 
 

 
 

Corporate securities
$
5,102

 
$
507

 
$
(18
)
 
$
5,591

 
 
$
1,413

 
$
4,178

Mortgage-backed securities
321

 
18

 

 
339

 
 
120

 
219

Total investments
5,423

 
525

 
(18
)
 
5,930

 
 
1,533

 
4,397

 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted Investments
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
1,358

 
52

 

 
1,410

 
 
1,290

 
120

U.S. government and agency securities
3,754

 
432

 

 
4,186

 
 

 
4,186

Total restricted investments
5,112

 
484

 

 
5,596

 
 
1,290

 
4,306

Total
$
10,535

 
$
1,009

 
$
(18
)
 
$
11,526

 
 
$
2,823

 
$
8,703

 
 
 
 
 
 
 
 
 
 
 
 
 

The amortized cost and fair value of the Company's available-for-sale securities as of January 28, 2012 were:

($000)
Amortized
cost

 
Unrealized
gains

 
Unrealized
losses

 
Fair value
 
 
Short-term
 
Long-term
Investments
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
5,080

 
$
501

 
$
(78
)
 
$
5,503

 
 
$
401

 
$
5,102

Mortgage-backed securities
728

 
29

 

 
757

 
 
257

 
500

Total investments
5,808

 
530

 
(78
)
 
6,260

 
 
658

 
5,602

 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted Investments
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
1,357

 
94

 

 
1,451

 
 

 
1,451

U.S. government and agency securities
3,769

 
431

 

 
4,200

 
 

 
4,200

Total restricted investments
$
5,126

 
$
525

 
$

 
$
5,651

 
 
$

 
$
5,651

Total
10,934

 
1,055

 
(78
)
 
11,911

 
 
658

 
11,253

 
 
 
 
 
 
 
 
 
 
 
 
 


8



The amortized cost and fair value of the Company’s available-for-sale securities as of October 29, 2011 were:

($000)
Amortized
cost

 
Unrealized
gains

 
Unrealized
losses

 
Fair value

 
 
Short-term

 
Long-term

Investments
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
5,079

 
$
443

 
$
(72
)
 
$
5,450

 
 
$

 
$
5,450

Mortgage-backed securities
800

 
32

 

 
832

 
 
298

 
534

Total investments
5,879

 
475

 
(72
)
 
6,282

 
 
298

 
5,984

 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted Investments
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
1,357

 
95

 

 
1,452

 
 

 
1,452

U.S. government and agency securities
3,774

 
325

 

 
4,099

 
 

 
4,099

Total restricted investments
5,131

 
420

 

 
5,551

 
 

 
5,551

Total
$
11,010

 
$
895

 
$
(72
)
 
$
11,833

 
 
$
298

 
$
11,535

 
 
 
 
 
 
 
 
 
 
 
 
 

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.

Investments and restricted investments measured at fair value at October 27, 2012 are summarized below:

 
 
 
Fair Value Measurements at Reporting Date
 
October 27,
2012

 
Quoted prices in
active markets for
identical assets

 
Significant
other
observable
inputs

 
Significant
unobservable
inputs

($000)
 
(Level 1)

 
(Level 2)

 
(Level 3)

Investments
 
 
 
 
 
 
 
Corporate securities
$
5,591

 
$

 
$
5,591

 
$

Mortgage-backed securities
339

 

 
339

 

Total investments
5,930

 

 
5,930

 

 
 
 
 
 
 
 
 
Restricted Investments
 
 
 
 
 
 
 
Corporate securities
1,410

 

 
1,410

 

U.S. government and agency securities
4,186

 
4,186

 

 

Total restricted investments
5,596

 
4,186

 
1,410

 

Total
$
11,526

 
$
4,186

 
$
7,340

 
$

 
 
 
 
 
 
 
 


9



Investments and restricted investments measured at fair value at January 28, 2012 are summarized below:

 
 
 
Fair Value Measurements at Reporting Date
 
January 28,
2012

 
Quoted prices in
active markets for
identical assets

 
Significant
other
observable
inputs

 
Significant
unobservable
inputs

($000)
 
(Level 1)

 
(Level 2)

 
(Level 3)

Investments
 
 
 
 
 
 
 
Corporate securities
$
5,503

 
$

 
$
5,503

 
$

Mortgage-backed securities
757

 

 
757

 

Total investments
6,260

 

 
6,260

 

Restricted Investments
 
 
 
 
 
 
 
Corporate securities
1,451

 

 
1,451

 

U.S. government and agency securities
4,200

 
4,200

 

 

Total restricted investments
5,651

 
4,200

 
1,451

 

Total
$
11,911

 
$
4,200

 
$
7,711

 
$

 
 
 
 
 
 
 
 

Investments and restricted investments measured at fair value at October 29, 2011 are summarized below:

 
 
 
Fair Value Measurements at Reporting Date
 
October 29,
2011

 
Quoted prices in
active markets for
identical assets

 
Significant
other
observable
inputs

 
Significant
unobservable
inputs

($000)
 
(Level 1)

 
(Level 2)

 
(Level 3)

Investments
 
 
 
 
 
 
 
Corporate securities
$
5,450

 
$

 
$
5,450

 
$

Mortgage-backed securities
832

 

 
832

 

Total investments
6,282

 

 
6,282

 

Restricted Investments
 
 
 
 
 
 
 
Corporate securities
1,452

 

 
1,452

 

U.S. government and agency securities
4,099

 
4,099

 

 

Total restricted investments
5,551

 
4,099

 
1,452

 

Total
$
11,833

 
$
4,099

 
$
7,734

 
$

 
 
 
 
 
 
 
 

The future maturities of investment and restricted investment securities at October 27, 2012 were:

 
Investments
 
Restricted Investments
($000)
Cost basis

 
Estimated fair value

 
Cost basis

 
Estimated fair value

Maturing in one year or less
$
1,503

 
$
1,533

 
$
1,249

 
$
1,290

Maturing after one year through five years
2,821

 
3,040

 
253

 
268

Maturing after five years through ten years
1,099

 
1,357

 
3,610

 
4,038

 
$
5,423

 
$
5,930

 
$
5,112

 
$
5,596

 
 
 
 
 
 
 
 


10



The underlying assets in the Company’s non-qualified deferred compensation program totaling $74.9 million, $67.5 million and $67.6 million as of October 27, 2012, January 28, 2012, and October 29, 2011, respectively (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 $63.2 million, $57.8 million, and $57.7 million as of October 27, 2012, January 28, 2012, and October 29, 2011, respectively. The fair value measurement for funds without quoted market prices in active markets (Level 2) totaled $11.7 million, $9.7 million, and $9.9 million as of October 27, 2012, January 28, 2012, and October 29, 2011, respectively. 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.

Note C: Stock-Based Compensation

Stock-based compensation. For the three and nine month periods ended October 27, 2012 and October 29, 2011, the Company recognized stock-based compensation expense as follows:

 
Three Months Ended
 
Nine Months Ended
($000)
October 27,
2012

 
October 29,
2011

 
October 27,
2012

 
October 29,
2011

Restricted stock
$
7,547

 
$
6,362

 
$
21,643

 
$
16,797

Performance awards
5,091

 
4,377

 
14,323

 
12,519

ESPP
502

 
392

 
1,414

 
1,095

Total
$
13,140

 
$
11,131

 
$
37,380

 
$
30,411

 
 
 
 
 
 
 
 

Total stock-based compensation recognized in the Company's Condensed Consolidated Statements of Earnings for the three and nine month periods ended October 27, 2012 and October 29, 2011 is as follows:

 
Three Months Ended
 
Nine Months Ended
Statements of Earnings Classification ($000)
October 27,
2012

 
October 29,
2011

 
October 27,
2012

 
October 29,
2011

Cost of goods sold
$
6,457

 
$
4,954

 
$
17,434

 
$
13,110

Selling, general and administrative
6,683

 
6,177

 
19,946

 
17,301

Total
$
13,140

 
$
11,131

 
$
37,380

 
$
30,411

 
 
 
 
 
 
 
 

Restricted stock. The Company grants shares of restricted stock or restricted stock units to directors, officers, and key employees. The market value of shares of restricted stock or of the stock underlying restricted stock units at the date of grant is amortized to expense ratably over the vesting period of generally three to five years.

During the nine month period ended October 27, 2012, shares purchased by the Company for tax withholding totaled approximately 492,000 shares and are considered treasury shares which are available for reissuance. As of October 27, 2012, shares subject to repurchase related to unvested restricted stock totaled 4.8 million shares.

(000, except per share data)
Number of
shares

 
Weighted
average
grant date
fair value

Unvested at January 28, 2012
5,353

 
$
23.23

Awarded
900

 
49.81

Released
(1,448
)
 
19.14

Forfeited
(37
)
 
28.99

Unvested at October 27, 2012
4,768

 
$
29.46

 
 
 
 


11



The unamortized compensation expense for all plans at October 27, 2012 was $83.5 million, which is expected to be recognized over a weighted-average remaining period of 2.0 years. The unamortized compensation expense for all plans at October 29, 2011 was $74.3 million, which was expected to be recognized over a weighted-average remaining period of 2.1 years.

Performance shares. The Company has a performance share award program for senior executives. A performance share award represents a right to receive shares of restricted stock or restricted stock units on a specified settlement date based on the Company’s attainment of a profitability-based performance goal during the performance period, which is the Company’s fiscal year. If attained, the restricted stock or units then issued vest over a service period, generally two to three years from the date the performance award was granted. Shares related to restricted stock units earned are deferred for release generally one year from the date earned.

Employee stock purchase plan. Under the Employee Stock Purchase Plan (“ESPP”), eligible employees participating in the quarterly 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. 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 nine month period ended October 27, 2012:
(000, except per share data)
Number of
shares

 
Weighted
average
exercise
price

 
Weighted
average
remaining
contractual
term
 
Aggregate
intrinsic
value

Outstanding at January 28, 2012
2,418

 
$
13.24

 
 
 
 
Granted

 

 
 
 
 
Exercised
(613
)
 
11.97

 
 
 
 
Forfeited

 

 
 
 
 
Outstanding at October 27, 2012, all vested
1,805

 
$
13.67

 
2.31
 
$
85,305

 
 
 
 
 
 
 
 

No stock options were granted during the nine month periods ended October 27, 2012 and October 29, 2011.

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 October 27, 2012 (number of shares in thousands):

 
 
 
 
Options outstanding and exercisable
Exercise price range
 
Number of
shares

 
Remaining
life
 
Exercise
price

$
8.45

to
$
13.76

 
464

 
1.40
 
$
11.61

13.77

to
14.12

 
469

 
3.01
 
13.89

14.13

to
14.44

 
452

 
2.42
 
14.33

14.45

to
16.43

 
420

 
2.40
 
14.98

$
8.45

to
$
16.43

 
1,805

 
2.31
 
$
13.67

 
 
 
 
 
 
 
 
 



12



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 and restricted stock units.

For the three and nine month periods ended October 27, 2012, approximately 7,700 and 35,200 weighted average shares, respectively, were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive in the period presented. For the three and nine month periods ended October 29, 2011, approximately 800 and 2,600 weighted average shares, respectively, 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
 
 
Nine Months Ended
Shares in (000s)
Basic EPS

 
Effect of
dilutive
common stock
equivalents

 
Diluted
EPS

 
 
Basic EPS

 
Effect of
dilutive
common
stock
equivalents

 
Diluted
EPS

October 27, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Shares
218,583

 
3,602

 
222,185

 
 
219,917

 
3,679

 
223,596

Amount
$
0.73

 
$
(0.01
)
 
$
0.72

 
 
$
2.50

 
$
(0.04
)
 
$
2.46

 
 
 
 
 
 
 
 
 
 
 
 
 
October 29, 2011
 
 
 
 
 
 
 
 
 
 
 
 
     Shares
224,540

 
3,920

 
228,460

 
 
227,125

 
3,980

 
231,105

     Amount
$
0.64

 
$
(0.01
)
 
$
0.63

 
 
$
2.05

 
$
(0.04
)
 
$
2.01

 
 
 
 
 
 
 
 
 
 
 
 
 

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 October 27, 2012 of approximately $182 million is estimated by obtaining comparable market quotes which are considered to be Level 1 inputs under the fair value measurements and disclosures guidance. The senior notes are subject to prepayment penalties for early payment of principal.

In June 2012, the Company amended its existing $600 million unsecured revolving credit facility. The amended credit facility expires in June 2017 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 112.5 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 October 27, 2012. As of October 27, 2012, the Company’s $600 million credit facility remains in place and available.

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 October 27, 2012, the Company was in compliance with these covenants.



13



Note F: Taxes on Earnings

As of October 27, 2012 and October 29, 2011, the reserves for unrecognized tax benefits (net of federal tax benefits) were $60.3 million and $52.1 million inclusive of $12.2 million and $12.8 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, $40.3 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 $1.4 million.

The Company is generally open to audit by the Internal Revenue Service under the statute of limitations for fiscal years 2009 through 2011. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years 2007 through 2011. 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 condensed consolidated financial statements.

14



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 October 27, 2012 and October 29, 2011, and the related condensed consolidated statements of earnings and comprehensive income for the three-month and nine-month periods ended October 27, 2012 and October 29, 2011, and of cash flows for the nine-month periods ended October 27, 2012 and October 29, 2011. These 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 sheets of the Company as of January 28, 2012, 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 27, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheets as of January 28, 2012, is fairly stated, in all material respects, in relation to the consolidated balance sheets from which it has been derived.


/s/Deloitte & Touche LLP

San Francisco, California
December 5, 2012

15



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 2011. All information is based on our fiscal calendar.

Overview

Ross Stores, Inc. operates two brands of off-price retail apparel and home fashion stores -- 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 1,097 locations in 33 states, the District of Columbia and Guam, as of October 27, 2012. 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. As of October 27, 2012, we also operate 108 dd’s DISCOUNTS stores in eight 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 nine month periods ended October 27, 2012 and October 29, 2011:
 
Three Months Ended
 
Nine Months Ended
 
October 27,
2012

 
October 29,
2011

 
October 27,
2012

 
October 29,
2011

Sales
 
 
 
 
 
 
 
Sales (millions)
$
2,263

 
$
2,046

 
$
6,960

 
$
6,210

Sales growth
10.6
%
 
9.2
%
 
12.1
%
 
8.6
%
Comparable store sales growth
6
%
 
5
%
 
7
%
 
5
%
 
 
 
 
 
 
 
 
Costs and expenses (as a percent of sales)
 
 
 
 
 
 
 
Cost of goods sold
72.9
%
 
72.8
%
 
72.1
%
 
72.4
%
Selling, general and administrative
15.8
%
 
16.2
%
 
15.1
%
 
15.5
%
Interest expense, net
0.1
%
 
0.1
%
 
0.1
%
 
0.1
%
 
 
 
 
 
 
 
 
Earnings before taxes (as a percent of sales)
11.2
%
 
10.8
%
 
12.8
%
 
12.0
%

 
 
 
 
 
 
 
Net earnings (as a percent of sales)
7.1
%
 
7.0
%
 
7.9
%
 
7.5
%


16




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
 
Nine Months Ended
Store Count
October 27,
2012

 
October 29,
2011

 
October 27,
2012

 
October 29,
2011

Beginning of the period
1,174

 
1,091

 
1,125

 
1,055

Opened in the period
31

 
39

 
82

 
80

Closed in the period

 
(4
)
 
(2
)
 
(9
)
End of the period
1,205

 
1,126

 
1,205

 
1,126

 
 
 
 
 
 
 
 

Sales. Sales for the three month period ended October 27, 2012 increased $216.3 million, or 11%, compared to the three month period ended October 29, 2011, due to the opening of 79 net new stores between October 29, 2011 and October 27, 2012 and a 6% increase in “comparable” store sales (defined as stores that have been open for more than 14 complete months) on top of a 5% gain in the prior year.

Sales for the nine month period ended October 27, 2012 increased $750.0 million, or 12%, compared to the nine month period ended October 29, 2011, due to the opening of 79 net new stores between October 29, 2011 and October 27, 2012 and an increase in comparable store sales of 7% on top of a 5% gain in the prior year.

Our sales mix for the three and nine month periods ended October 27, 2012 and October 29, 2011 is shown below:
 
Three Months Ended
 
Nine Months Ended
 
October 27,
2012

 
October 29,
2011

 
October 27,
2012

 
October 29,
2011

Ladies
29
%
 
29
%
 
30
%
 
31
%
Home accents and bed and bath
23
%
 
24
%
 
23
%
 
24
%
Accessories, lingerie, fine jewelry, and fragrances
14
%
 
13
%
 
13
%
 
12
%
Shoes
13
%
 
13
%
 
13
%
 
13
%
Men's
12
%
 
12
%
 
13
%
 
12
%
Children's
9
%
 
9
%
 
8
%
 
8
%
Total
100
%
 
100
%
 
100
%
 
100
%