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8-K

 
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Ross Stores 10-Q 2013

Documents found in this filing:

  1. 10-Q
  2. Ex-15
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7.  
ROST-2013.8.3-10Q


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 August 3, 2013
 
 
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 August 22, 2013 was 216,683,333.

1



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Statements of Earnings

 
Three Months Ended
 
Six Months Ended
($000, except stores and per share data, unaudited)
August 3,
2013

 
July 28,
2012

 
August 3,
2013

 
July 28,
2012

Sales
$
2,551,277

 
$
2,340,855

 
$
5,091,191

 
$
4,697,696

 
 
 
 
 
 
 
 
Costs and Expenses
 
 
 
 
 
 
 
Costs of goods sold
1,823,777

 
1,689,643

 
3,622,588

 
3,368,770

Selling, general and administrative
381,193

 
352,089

 
743,161

 
689,900

Interest (income) expense, net
(175
)
 
2,086

 
34

 
4,318

Total costs and expenses
2,204,795

 
2,043,818

 
4,365,783

 
4,062,988

 
 
 
 
 
 
 
 
Earnings before taxes
346,482

 
297,037

 
725,408

 
634,708

Provision for taxes on earnings
133,361

 
115,013

 
277,675

 
244,071

Net earnings
$
213,121

 
$
182,024

 
$
447,733

 
$
390,637

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
1.00

 
$
0.83

 
$
2.09

 
$
1.77

Diluted
$
0.98

 
$
0.81

 
$
2.06

 
$
1.74

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding (000)
 
 
 
 
 
 
 
Basic
213,836

 
220,065

 
214,622

 
220,585

Diluted
216,613

 
223,605

 
217,570

 
224,289

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.17

 
$
0.14

 
$
0.17

 
$
0.14

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stores open at end of period
1,253

 
1,174

 
1,253

 
1,174

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

2



Condensed Consolidated Statements of Comprehensive Income

 
Three Months Ended
 
Six Months Ended
($000, unaudited)
August 3, 2013

 
July 28, 2012

 
August 3,
2013

 
July 28,
2012

Net earnings
$
213,121

 
$
182,024

 
$
447,733

 
$
390,637

 
 
 
 
 
 
 
 
Other comprehensive income:
 
 
 
 
 
 
 
Change in unrealized (loss) gain on investments, net of tax
(147
)
 
25

 
(146
)
 
16

Comprehensive income
$
212,974

 
$
182,049

 
$
447,587

 
$
390,653

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

3



Condensed Consolidated Balance Sheets

($000, unaudited)
August 3, 2013

 
February 2, 2013

 
July 28, 2012

Assets
 
 
 
 
 
Current Assets
 
 
 
 
 
Cash and cash equivalents
$
550,565

 
$
646,761

 
$
721,046

Short-term investments
13

 
1,087

 
1,456

Accounts receivable
79,202

 
59,617

 
65,731

Merchandise inventory
1,330,536

 
1,209,237

 
1,219,092

Prepaid expenses and other
115,025

 
94,318

 
98,718

Deferred income taxes
23,136

 
20,407

 
11,949

Total current assets
2,098,477

 
2,031,427

 
2,117,992

 
 
 
 
 
 
Property and Equipment
 
 
 
 
 
Land and buildings
449,604

 
372,659

 
343,638

Fixtures and equipment
1,593,123

 
1,551,590

 
1,495,980

Leasehold improvements
773,020

 
732,671

 
690,608

Construction-in-progress
339,714

 
258,691

 
126,748

  
3,155,461

 
2,915,611

 
2,656,974

Less accumulated depreciation and amortization
1,509,004

 
1,422,327

 
1,361,877

Property and equipment, net
1,646,457

 
1,493,284

 
1,295,097

 
 
 
 
 
 
Long-term investments
4,215

 
4,374

 
4,540

Other long-term assets
159,336

 
141,476

 
142,534

Total assets
$
3,908,485

 
$
3,670,561

 
$
3,560,163

 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
Current Liabilities
 
 
 
 
 
Accounts payable
$
938,059

 
$
807,534

 
$
885,892

Accrued expenses and other
342,851

 
320,415

 
315,748

Accrued payroll and benefits
190,904

 
241,129

 
199,937

Income taxes payable

 
53,504

 
13,559

Total current liabilities
1,471,814

 
1,422,582

 
1,415,136

 
 
 
 
 
 
Long-term debt
150,000

 
150,000

 
150,000

Other long-term liabilities
270,776

 
246,815

 
215,910

Deferred income taxes
84,925

 
84,301

 
114,964

 
 
 
 
 
 
Commitments and contingencies


 


 


 
 
 
 
 
 
Stockholders’ Equity
 
 
 
 
 
Common stock
2,170

 
2,207

 
2,241

Additional paid-in capital
910,522

 
866,519

 
839,259

Treasury stock
(118,460
)
 
(91,708
)
 
(86,865
)
Accumulated other comprehensive income
439

 
585

 
652

Retained earnings
1,136,299

 
989,260

 
908,866

Total stockholders’ equity
1,930,970

 
1,766,863

 
1,664,153

Total liabilities and stockholders’ equity
$
3,908,485

 
$
3,670,561

 
$
3,560,163

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

4



Condensed Consolidated Statements of Cash Flows
 
Six Months Ended
($000, unaudited)
August 3, 2013

 
July 28, 2012

Cash Flows From Operating Activities
 
 
 
Net earnings
$
447,733

 
$
390,637

Adjustments to reconcile net earnings to net cash provided
by operating activities
 
 
 
Depreciation and amortization
98,853

 
87,684

Stock-based compensation
24,211

 
24,241

Deferred income taxes
(2,105
)
 
93

Tax benefit from equity issuance
22,544

 
24,577

Excess tax benefit from stock-based compensation
(22,123
)
 
(23,984
)
Change in assets and liabilities:
 
 
 
Merchandise inventory
(121,299
)
 
(89,022
)
Other current assets
(36,751
)
 
(24,845
)
Accounts payable
168,084

 
156,026

Other current liabilities
(61,570
)
 
(44,081
)
Other long-term, net
14,751

 
2,837

Net cash provided by operating activities
532,328

 
504,163

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Additions to property and equipment
(271,690
)
 
(152,105
)
Increase in restricted cash and investments
(12,345
)
 
(4,970
)
Purchases of investments

 
(424
)
Proceeds from investments
1,139

 
704

Net cash used in investing activities
(282,896
)
 
(156,795
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Excess tax benefit from stock-based compensation
22,123

 
23,984

Issuance of common stock related to stock plans
10,213

 
11,467

Treasury stock purchased
(26,752
)
 
(24,603
)
Repurchase of common stock
(276,608
)
 
(223,743
)
Dividends paid
(74,604
)
 
(63,262
)
Net cash used in financing activities
(345,628
)
 
(276,157
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(96,196
)
 
71,211

 
 
 
 
Cash and cash equivalents:
 
 
 
Beginning of period
646,761

 
649,835

End of period
$
550,565

 
$
721,046

 
 
 
 
Supplemental Cash Flow Disclosures
 
 
 
Interest paid
$
4,834

 
$
4,834

Income taxes paid
$
305,040

 
$
235,260

 
 
 
 
Non-Cash Investing Activities
 
 
 
(Decrease) increase in fair value of investment securities
$
(227
)
 
$
25

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

5



Notes to Condensed Consolidated Financial Statements

Three and Six Months Ended August 3, 2013 and July 28, 2012
(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 August 3, 2013 and July 28, 2012, the results of operations and comprehensive income for the three and six month periods ended August 3, 2013 and July 28, 2012, and cash flows for the six month periods ended August 3, 2013 and July 28, 2012. The Condensed Consolidated Balance Sheet as of February 2, 2013, 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 February 2, 2013. 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 February 2, 2013.

The results of operations and comprehensive income for the three and six month periods ended August 3, 2013 and July 28, 2012 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

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. The following table summarizes total restricted cash, cash equivalents, and investments which were included in prepaid expenses and other and other long-term assets in the Condensed Consolidated Balance Sheet as of August 3, 2013, February 2, 2013, and July 28, 2012:

Restricted Assets ($000)
August 3, 2013

 
February 2, 2013

 
July 28, 2012

Prepaid expenses and other
$
23,483

 
$
19,941

 
$
20,084

Other long-term assets
57,492

 
48,821

 
51,645

Total
$
80,975

 
$
68,762

 
$
71,729


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, and other long-term liabilities approximates their estimated fair value.

Cash and cash equivalents were $550.6 million, $646.8 million, and $721.0 million at August 3, 2013, February 2, 2013, and July 28, 2012, 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 six month periods ended August 3, 2013 and July 28, 2012:

 
Three Months Ended
 
 
Six Months Ended
 
August 3,
2013

 
July 28,
2012

 
 
August 3,
2013

 
July 28,
2012

Ladies
31
%
 
31
%
 
 
31
%
 
31
%
Home accents and bed and bath
22
%
 
22
%
 
 
22
%
 
23
%
Shoes
13
%
 
13
%
 
 
13
%
 
14
%
Accessories, lingerie, fine jewelry, and fragrances
13
%
 
13
%
 
 
13
%
 
12
%
Men's
13
%
 
13
%
 
 
13
%
 
12
%
Children's
8
%
 
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.

The Company's Board of Directors declared quarterly cash dividends of $0.17 per common share, in January and May 2013. The Company’s Board of Directors declared cash dividends of $0.14 per common share in January, May, August, and November 2012, respectively.

In August 2013, the Company's Board of Directors declared a cash dividend of $0.17 per common share, payable on September 30, 2013.

Revenue recognition. The Company recognizes revenue at the point of sale and maintains an allowance for estimated future returns. Sales of stored value cards are deferred until they are redeemed for the purchase of Company merchandise. The Company’s stored value cards do not have expiration dates. Based upon historical redemption rates, a small percentage of stored value cards will never be redeemed, which represents breakage. The Company recognizes income from stored value 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 August 3, 2013 and July 28, 2012.

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 alleging violation of wage and hour and other employment laws. Class action litigation remains pending as of August 3, 2013.

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 and regulatory 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 August 3, 2013 were:
($000)
Amortized
cost

 
Unrealized
gains

 
Unrealized
losses

 
Fair value

 
 
Short-term

 
Long-term

Investments
 

 
 

 


 
 

 
 
 

 
 

Corporate securities
$
3,712

 
$
378

 
$
(12
)
 
$
4,078

 
 
$

 
$
4,078

Mortgage-backed securities
141

 
9

 

 
150

 
 
13

 
137

Total investments
3,853

 
387

 
(12
)
 
4,228

 
 
13

 
4,215

 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted Investments
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
110

 
7

 

 
117

 
 

 
117

U.S. government and agency securities
3,738

 
292

 

 
4,030

 
 
146

 
3,884

Total restricted investments
3,848

 
299

 

 
4,147

 
 
146

 
4,001

Total
$
7,701

 
$
686

 
$
(12
)
 
$
8,375

 
 
$
159

 
$
8,216


The amortized cost and fair value of the Company's available-for-sale securities as of February 2, 2013 were:

($000)
Amortized
cost

 
Unrealized
gains

 
Unrealized
losses

 
Fair value
 
 
Short-term
 
Long-term
Investments
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
4,715

 
$
468

 
$
(14
)
 
$
5,169

 
 
$
1,013

 
$
4,156

Mortgage-backed securities
276

 
16

 

 
292

 
 
74

 
218

Total investments
4,991

 
484

 
(14
)
 
5,461

 
 
1,087

 
4,374

 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted Investments
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
1,360

 
34

 

 
1,394

 
 
1,275

 
119

U.S. government and agency securities
3,748

 
397

 

 
4,145

 
 

 
4,145

Total restricted investments
5,108

 
431

 

 
5,539

 
 
1,275

 
4,264

Total
$
10,099

 
$
915

 
$
(14
)
 
$
11,000

 
 
$
2,362

 
$
8,638



8



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

($000)
Amortized
cost

 
Unrealized
gains

 
Unrealized
losses

 
Fair value

 
 
Short-term

 
Long-term

Investments
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
$
5,104

 
$
490

 
$
(45
)
 
$
5,549

 
 
$
1,424

 
$
4,125

Mortgage-backed securities
425

 
22

 

 
447

 
 
32

 
415

Total investments
5,529

 
512

 
(45
)
 
5,996

 
 
1,456

 
4,540

 
 
 
 
 
 
 
 
 
 
 
 
 
Restricted Investments
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
1,358

 
67

 

 
1,425

 
 
255

 
1,170

U.S. government and agency securities
3,759

 
468

 

 
4,227

 
 

 
4,227

Total restricted investments
5,117

 
535

 

 
5,652

 
 
255

 
5,397

Total
$
10,646

 
$
1,047

 
$
(45
)
 
$
11,648

 
 
$
1,711

 
$
9,937


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 August 3, 2013 are summarized below:

 
Fair Value Measurements at Reporting Date
($000)
August 3, 2013

 
Quoted prices in
active markets for
identical assets (Level 1)

 
Significant
other
observable
inputs (Level 2)

 
Significant
unobservable
inputs (Level 3)

Investments
 
 
 
 
 
 
 
Corporate securities
$
4,078

 
$

 
$
4,078

 
$

Mortgage-backed securities
150

 

 
150

 

Total investments
4,228

 

 
4,228

 

 
 
 
 
 
 
 
 
Restricted Investments
 
 
 
 
 
 
 
Corporate securities
117

 

 
117

 

U.S. government and agency securities
4,030

 
4,030

 

 

Total restricted investments
4,147

 
4,030

 
117

 

Total
$
8,375

 
$
4,030

 
$
4,345

 
$



9



Investments and restricted investments measured at fair value at February 2, 2013 are summarized below:

 
Fair Value Measurements at Reporting Date
($000)
February 2, 2013

 
Quoted prices in
active markets for
identical assets (Level 1)

 
Significant
other
observable
inputs (Level 2)

 
Significant
unobservable
inputs (Level 3)

Investments
 
 
 
 
 
 
 
Corporate securities
$
5,169

 
$

 
$
5,169

 
$

Mortgage-backed securities
292

 

 
292

 

Total investments
5,461

 

 
5,461

 

 
 
 
 
 
 
 
 
Restricted Investments
 
 
 
 
 
 
 
Corporate securities
1,394

 

 
1,394

 

U.S. government and agency securities
4,145

 
4,145

 

 

Total restricted investments
5,539

 
4,145

 
1,394

 

Total
$
11,000

 
$
4,145

 
$
6,855

 
$


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

 
Fair Value Measurements at Reporting Date
($000)
July 28, 2012

 
Quoted prices in
active markets for
identical assets (Level 1)

 
Significant
other
observable
inputs (Level 2)

 
Significant
unobservable
inputs (Level 3)

Investments
 
 
 
 
 
 
 
Corporate securities
$
5,549

 
$

 
$
5,549

 
$

Mortgage-backed securities
447

 

 
447

 

Total investments
5,996

 

 
5,996

 

 
 
 
 
 
 
 
 
Restricted Investments
 
 
 
 
 
 
 
Corporate securities
1,425

 

 
1,425

 

U.S. government and agency securities
4,227

 
4,227

 

 

Total restricted investments
5,652

 
4,227

 
1,425

 

Total
$
11,648

 
$
4,227

 
$
7,421

 
$


The future maturities of investment and restricted investment securities at August 3, 2013 were:

 
Investments
 
Restricted Investments
($000)
Cost basis

 
Estimated fair value

 
Cost basis

 
Estimated fair value

Maturing in one year or less
$
13

 
$
13

 
$
144

 
$
146

Maturing after one year through five years
3,340

 
3,613

 
808

 
894

Maturing after five years through ten years
500

 
602

 
2,896

 
3,107

Total
$
3,853

 
$
4,228

 
$
3,848

 
$
4,147



10



The underlying assets in the Company’s non-qualified deferred compensation program totaling $86.3 million, $76.9 million and $74.2 million as of August 3, 2013, February 2, 2013, and July 28, 2012, 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 $74.6 million, $65.9 million, and $63.5 million as of August 3, 2013, February 2, 2013, and July 28, 2012, respectively. The fair value measurement for funds without quoted market prices in active markets (Level 2) totaled $11.7 million, $11.0 million, and $10.7 million as of August 3, 2013, February 2, 2013, and July 28, 2012, 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 six month periods ended August 3, 2013 and July 28, 2012, the Company recognized stock-based compensation expense as follows:

 
Three Months Ended
 
 
Six Months Ended
($000)
August 3, 2013

 
July 28, 2012

 
 
August 3,
2013

 
July 28,
2012

Restricted stock
$
7,963

 
$
7,349

 
 
$
15,691

 
$
14,097

Performance awards
3,924

 
4,836

 
 
7,453

 
9,232

ESPP
536

 
469

 
 
1,067

 
912

Total
$
12,423

 
$
12,654

 
 
$
24,211

 
$
24,241


Total stock-based compensation recognized in the Company's Condensed Consolidated Statements of Earnings for the three and six month periods ended August 3, 2013 and July 28, 2012 is as follows:

 
Three Months Ended
 
 
Six Months Ended
Statements of Earnings Classification ($000)
August 3,
2013

 
July 28,
2012

 
 
August 3,
2013

 
July 28,
2012

Cost of goods sold
$
6,338

 
$
5,984

 
 
$
12,635

 
$
10,975

Selling, general and administrative
6,085

 
6,670

 
 
11,576

 
13,266

Total
$
12,423

 
$
12,654

 
 
$
24,211

 
$
24,241


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 and 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 three and six month periods ended August 3, 2013, shares acquired by the Company for tax withholding totaled 13,966 and 452,064 shares and are considered treasury shares which are available for reissuance. As of August 3, 2013, shares subject to repurchase related to unvested restricted stock totaled 4.1 million shares.

(000, except per share data)
Number of
shares

 
Weighted
average
grant date
fair value

Unvested at February 2, 2013
4,560

 
$
29.96

Awarded
697

 
57.11

Released
(1,159
)
 
23.72

Forfeited
(37
)
 
32.22

Unvested at August 3, 2013
4,061

 
$
36.41



11



The unamortized compensation expense at August 3, 2013 was $93.4 million, which is expected to be recognized over a weighted-average remaining period of 2.1 years. The unamortized compensation expense at July 28, 2012 was $84.3 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 vest over a service period, generally two to three years from the date the performance award was granted. The release of shares related to restricted stock units earned are deferred generally for 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 six month period ended August 3, 2013:
(000, except per share data)
Number of
shares

 
Weighted average
exercise price

 
Weighted average remaining contractual term
 
Aggregate intrinsic value

Outstanding at February 2, 2013
1,715

 
$
13.79

 
 
 
 
Granted

 

 
 
 
 
Exercised
(335
)
 
12.52

 
 
 
 
Forfeited

 

 
 
 
 
Outstanding at August 3, 2013, all vested
1,380

 
$
14.09

 
1.83
 
$
75,690


No stock options were granted during the six month periods ended August 3, 2013 and July 28, 2012.

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 August 3, 2013 (number of shares in thousands):

 
 
 
 
Options outstanding and exercisable
Exercise price range
 
Number of shares

 
Remaining life
 
Exercise price

$
11.39

to
$
13.81

 
276

 
1.72
 
$
12.90

13.83

to
13.91

 
296

 
2.41
 
13.89

13.92

to
14.35

 
454

 
1.55
 
14.30

14.36

to
14.84

 
293

 
1.48
 
14.67

14.93

to
16.39

 
61

 
3.36
 
16.15

$
11.39

to
$
16.39

 
1,380

 
1.83
 
$
14.09




12



Note D: Earnings Per Share

The Company computes and reports both basic earnings per share ("EPS") and diluted EPS. Basic EPS is computed by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net earnings by the sum of the weighted average number of common shares and dilutive common stock equivalents outstanding during the period. Diluted EPS reflects the total potential dilution that could occur from outstanding equity plan awards, including unexercised stock options, and unvested shares of both performance and non-performance based awards of restricted stock and restricted stock units.

For the three and six month periods ended August 3, 2013, no shares and 500 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 28, 2012, 2,800 and 2,100 weighted average shares, respectively, were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive in the periods presented.

The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations:
 
Three Months Ended
 
 
Six 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

August 3, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Shares
213,836

 
2,777

 
216,613

 
 
214,622

 
2,948

 
217,570

Amount
$
1.00

 
$
(0.02
)
 
$
0.98

 
 
$
2.09

 
$
(0.03
)
 
$
2.06

 
 
 
 
 
 
 
 
 
 
 
 
 
July 28, 2012
 
 
 
 
 
 
 
 
 
 
 
 
     Shares
220,065

 
3,540

 
223,605

 
 
220,585

 
3,704

 
224,289

     Amount
$
0.83

 
$
(0.02
)
 
$
0.81

 
 
$
1.77

 
$
(0.03
)
 
$
1.74


Note E: Debt

Senior notes. The Company has issued two series of unsecured senior notes in the aggregate principal amount of $150 million, held by various institutional investors. 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 August 3, 2013 of approximately $185 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.

Revolving credit facility. The Company's $600 million unsecured revolving credit facility, as amended in June 2012, 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 100.0 basis points) and is payable quarterly and upon maturity. The Company had no borrowings outstanding or letters of credit issued under this facility as of August 3, 2013. As of August 3, 2013, 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 August 3, 2013, the Company was in compliance with these covenants.


13




Note F: Taxes on Earnings

As of August 3, 2013, February 2, 2013, and July 28, 2012, the reserves for unrecognized tax benefits were $93.9 million, $82.5 million, and $71.6 million inclusive of $20.6 million, $16.8 million, and $17.6 million of related interest and penalties, 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, $46.6 million would impact the Company’s effective tax rate. The difference between the total amount of unrecognized tax benefits and the amounts that would impact the effective tax rate relates to amounts attributable to deferred income tax assets and liabilities. These amounts are net of federal and state income taxes.

During the next twelve months, it is reasonably possible that the statute of limitations may lapse pertaining to positions taken by the Company in prior year tax returns. If this occurs, the total amount of unrecognized tax benefits may decrease, reducing the provision for taxes on earnings by up to $2.1 million.

The Company is generally open to audit by the Internal Revenue Service under the statute of limitations for fiscal years 2009 through 2012. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years 2008 through 2012. 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 August 3, 2013 and July 28, 2012, and the related condensed consolidated statements of earnings and comprehensive income for the three-month and six-month periods ended August 3, 2013 and July 28, 2012, and cash flows for the six-month periods ended August 3, 2013 and July 28, 2012. These interim condensed consolidated 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 February 2, 2013, and the related consolidated statements of earnings, comprehensive income, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated April 2, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying interim condensed consolidated balance sheets as of February 2, 2013, 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 11, 2013

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 2012. 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 1,131 locations in 33 states, the District of Columbia and Guam as of August 3, 2013. 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 122 dd’s DISCOUNTS stores in 10 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 as of August 3, 2013.

Results of Operations

The following table summarizes the financial results for the three and six month periods ended August 3, 2013 and July 28, 2012:
 
Three Months Ended
 
 
Six Months Ended
 
August 3,
2013

 
July 28,
2012

 
 
August 3,
2013

 
July 28,
2012

Sales
 
 
 
 
 
 
 
 
Sales (millions)
$
2,551

 
$
2,341

 
 
$
5,091

 
$
4,698

Sales growth
9.0
%
 
12.0
%
 
 
8.4
%
 
12.8
%
Comparable store sales growth
4
%
 
7
%
 
 
3
%
 
8
%
 
 
 
 
 
 
 
 
 
Costs and expenses (as a percent of sales)
 
 
 
 
 
 
 
 
Cost of goods sold
71.5
%
 
72.2
%
 
 
71.2
%
 
71.7
%
Selling, general and administrative
14.9
%
 
15.0
%
 
 
14.6
%
 
14.7
%
Interest (income) expense, net
0.0
%
 
0.1
%
 
 
0.0
%
 
0.1
%
 
 
 
 
 
 
 
 
 
Earnings before taxes (as a percent of sales)
13.6
%
 
12.7
%
 
 
14.2
%
 
13.5
%

 
 
 
 
 
 
 
 
Net earnings (as a percent of sales)
8.3
%
 
7.8
%
 
 
8.8
%
 
8.3
%


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
 
 
Six Months Ended
Store Count
August 3,
2013

 
July 28,
2012

 
 
August 3,
2013

 
July 28,
2012

Beginning of the period
1,227

 
1,146

 
 
1,199

 
1,125

Opened in the period
27

 
28

 
 
55

 
51

Closed in the period
(1
)
 

 
 
(1
)
 
(2
)
End of the period
1,253

 
1,174

 
 
1,253

 
1,174


Sales. Sales for the three month period ended August 3, 2013 increased $210.4 million, or 9%, compared to the three month period ended July 28, 2012, due to the opening of 79 net new stores between July 28, 2012 and August 3, 2013 and a 4% increase in “comparable” store sales (defined as stores that have been open for more than 14 complete months).

Sales for the six month period ended August 3, 2013 increased $393.5 million, or 8%, compared to the six month period ended July 28, 2012, due to the opening of 79 net new stores between July 28, 2012 and August 3, 2013 and a 3% increase in “comparable” store sales.

Our sales mix for the three and six month periods ended August 3, 2013 and July 28, 2012 is shown below:

 
Three Months Ended
 
 
Six Months Ended
 
August 3, 2013

 
July 28,
2012

 
 
August 3,
2013

 
July 28,
2012

Ladies
31
%
 
31
%
 
 
31
%
 
31
%
Home accents and bed and bath
22
%
 
22
%
 
 
22
%
 
23
%
Shoes
13
%
 
13
%
 
 
13
%
 
14
%
Accessories, lingerie, fine jewelry, and fragrances
13
%
 
13
%
 
 
13
%
 
12
%
Men's
13
%
 
13
%
 
 
13
%
 
12
%
Children's
8
%
 
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, diversify our merchandise mix, and more fully develop our organization and systems to improve regional and local merchandise offerings. Although our strategies and store expansion program contributed to sales gains for the three and six month periods ended August 3, 2013, 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 August 3, 2013 increased $134 million and $254 million compared to the same periods in the prior year, mainly due to increased sales from the opening of 79 net new stores between July 28, 2012 and August 3, 2013 and a 4% and 3% increase in comparable store sales, respectively.

Cost of goods sold as a percentage of sales for the three month period ended August 3, 2013 decreased approximately 70 basis points from the same period in the prior year.  This improvement was driven primarily by a 80 basis point increase in merchandise margin, which included a five basis point benefit from a lower inventory shortage accrual. These favorable trends were partially offset by a 10 basis point increase in distribution costs. Freight, occupancy, and buying and incentive costs as a percent of sales were relatively flat to the prior year period.


17



Cost of goods sold as a percentage of sales for the six month period ended August 3, 2013 decreased about 55 basis points from the same period in the prior year.  This improvement was driven primarily by a 60 basis point increase in merchandise margin, which included a five basis point benefit from a lower inventory shortage accrual and 5 basis points in lower freight expense. These favorable trends were partially offset by 10 basis points in higher buying and incentive costs.

We cannot be sure that the gross profit margins realized for the three and six month periods ended August 3, 2013 will continue in the future.

Selling, general and administrative expenses. For the three and six month periods ended August 3, 2013, selling, general and administrative expenses ("SG&A") increased $29 million and $53 million compared to the same periods in the prior year, mainly due to increased store operating costs reflecting the opening of 79 net new stores between July 28, 2012 and August 3, 2013.

Selling, general and administrative expenses as a percentage of sales for both the three and six month periods ended August 3, 2013 decreased by approximately 10 basis points, compared to the same periods in the prior year, primarily due to leverage on store operating costs from the 4% and 3% increase in comparable store sales.

Interest (income) expense, net. Net interest expense as a percentage of sales decreased by approximately 10 basis points for the three and six month periods ended August 3, 2013 compared to the same periods in the prior year, primarily due to higher capitalization of construction interest.

Taxes on earnings. Our effective tax rate for the three month periods ended August 3, 2013 and July 28, 2012 was approximately 38% and 39%, respectively, and our effective tax rate for the six month periods ended August 3, 2013 and July 28, 2012 was approximately 38%. Our effective tax rate represents the applicable combined federal and state statutory rates reduced by the federal benefit of state taxes deductible on federal returns. The effective rate is impacted 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 2013 will be about 38%.

Net earnings. Net earnings as a percentage of sales for the three and six month periods ended August 3, 2013 was higher compared to the same periods in the prior year, primarily due to lower cost of goods sold, lower SG&A expenses, and lower interest expense as a percentage of sales.

Earnings per share. Diluted earnings per share for the three month period ended August 3, 2013 was $0.98 compared to $0.81 in the prior year period. The 21% increase in diluted earnings per share is attributable to a 17% increase in net earnings and a 3% reduction in weighted average diluted shares outstanding due to the stock repurchase program. Diluted earnings per share for the six month period ended August 3, 2013 was $2.06 compared to $1.74 in the prior year period. The 18% increase in diluted earnings per share is attributable to a 15% increase in net earnings and a 3% reduction in weighted average diluted shares outstanding due to the stock repurchase program.

Financial Condition

Liquidity and Capital Resources

Our primary sources of funds for our business activities are cash flows from operations and short-term trade credit. Our primary ongoing cash requirements are for merchandise inventory purchases, payroll, rent, taxes, and capital expenditures in connection with new and existing stores, and investments in distribution centers, information systems, and buying and corporate offices. We also use cash to repurchase stock under our stock repurchase program and to pay dividends.

 
Six Months Ended
($000)
August 3, 2013

 
July 28, 2012

Cash provided by operating activities
$
532,328

 
$
504,163

Cash used in investing activities
(282,896
)