Ross Stores (ROST)

We believe that our ability to effectively execute certain off-price buying strategies is a key factor in our success.  Our buyers use a number of methods that enable us to offer our customers brand-name merchandise at strong everyday discounts relative to department and specialty stores.  By purchasing later in the merchandise buying cycle than department and specialty stores, we are able to take advantage of imbalances between retailers’ demand for products and manufacturers’ supply of those products.

Unlike most department and specialty stores, we typically do not require that manufacturers provide promotional and markdown allowances, return privileges, split shipments, drop shipments to stores or delayed deliveries of merchandise.  For most orders, only one delivery is made to one of our four distribution centers.  These flexible requirements further enable our buyers to obtain significant discounts on in-season purchases.

The vast majority of the merchandise that we offer in our stores is acquired through opportunistic purchases created by manufacturer overruns and canceled orders both during and at the end of a season.  These buys are referred to as “closeout” and “packaway” purchases.  Closeouts can be shipped to stores in-season allowing us to get in-season goods in our stores at lower prices.  Packaway merchandise is purchased with the intent that it will be stored in our warehouses until a later date, which may even be the beginning of the same selling season in the following year.  Packaway purchases are an effective method of increasing the percentage of prestige and national brands at competitive savings within our merchandise assortments.  Packaway merchandise is mainly fashion basics and, therefore, not usually affected by shifts in fashion trends. 

In 2005, we continued our emphasis on this important sourcing strategy in response to compelling opportunities available in the marketplace.  Packaway accounted for approximately 41% of total inventories as of January 28, 2006, compared to 43% at the end of the prior year.  We believe the strong discounts we are able to offer on packaway merchandise are a key driver of our business.

We are currently in the process of improving our existing analytical processes for merchandise planning, buying and allocation through the addition of new processes and systems enhancements that are expected to address more localized customer preferences.  The objective of these investments is to fine-tune our merchandise offerings at a more local level to improve sales productivity and gross profit margins.  These new analytical processes and systems enhancements are also expected to provide us with the tools to improve over time store sales productivity and profitability in both newer and existing regions and markets.

Our buying offices are located in New York City and Los Angeles, the nation’s two largest apparel markets.  These strategic locations allow our buyers to be in the market on a daily basis, sourcing opportunities and negotiating purchases with vendors and manufacturers.  These locations also enable our buyers to strengthen vendor relationships -- a key element in the success of our off-price buying strategies. 

Our buyers have an average of about 14 years of experience, including merchandising positions with other retailers such as Bloomingdale’s, Burlington Coat Factory, Dayton Hudson, Foot Locker, Kohl’s, Lechters, Lord & Taylor, Macy’s, Marshalls, Nordstrom, Robinsons/May, Sterns, T.J. Maxx and Value City.  In keeping with our strategy, since 1992 our merchandising staff for Ross Dress for Less^® (“Ross”) has grown over four-fold.  We believe that this increase enables our merchants to spend more time in the market which, in turn, should strengthen our ability to procure the most desirable brands at competitive discounts.

These off-price buying strategies enable us to purchase merchandise at net prices that are lower than prices paid by department and specialty stores.

Pricing.  The Company’s policy is to sell brand-name merchandise priced 20% to 60% below most department and specialty store regular prices.  Our pricing policy is reflected on the price tag displaying our selling price as well as the comparable selling price for that item in department and/or specialty stores.

Our pricing strategy differs from that of a department or specialty store.  We purchase our merchandise at lower prices and mark it up less than a department or specialty store.  This strategy enables us to offer customers consistently low prices.  Specified departments in the store are reviewed weekly for possible markdowns based on the rate of sale and the end of fashion seasons to promote faster turnover of merchandise inventory and accelerate the flow of fresh merchandise.

3

The Company has established a merchandise assortment that it believes is attractive to its target customer.  Although the Company offers fewer classifications of merchandise than most department stores, the Company generally offers a large selection of brand names within each classification with a wide assortment of vendors, labels, prices, colors, styles and fabrics within each size or item.  Over the past several years, the Company has diversified its merchandise offerings by adding new product categories such as maternity, small furniture or furniture accents, educational toys and games, luggage, gourmet food and cookware, sporting goods and, in select stores, fine jewelry.  Total comparable store sales by department in fiscal 2004 were approximately as follows:  Ladies 34%, Home Accents and Bed and Bath 21%, Men’s 16%, Fine Jewelry, Accessories, Lingerie and Fragrances 12%, Children’s 9% and Shoes 8%.

Purchasing.  The Company has a network of approximately 4,000 vendors and manufacturers and believes it has adequate sources of first-quality merchandise to meet its requirements.  The Company purchases the vast majority of its merchandise directly from manufacturers and has not experienced any difficulty in obtaining sufficient merchandise inventory.

The Company believes that its ability to effectively execute certain off-price buying strategies is a key factor in its success.  The Company’s buyers use a number of methods that enable the Company to offer its customers brand-name merchandise at strong everyday discounts relative to department and specialty stores.  By purchasing later in the merchandise buying cycle than department and specialty stores, the Company is able to take advantage of imbalances between retailers’ demand for products and manufacturers’ supply of those products.

Unlike most department and specialty stores, the Company does not typically require that manufacturers provide promotional and markdown allowances, return privileges, split shipments, drop shipments to stores or delayed deliveries of merchandise.  For most orders, only one delivery is made to one of the Company’s four distribution centers.  These flexible requirements further enable the Company’s buyers to obtain significant discounts on in-season purchases.

The vast majority of the merchandise that the Company offers in its stores is acquired through opportunistic purchases created by manufacturer overruns and canceled orders both during and at the end of a season.  These buys are referred to as “closeout” and “packaway” purchases.  Closeouts can be shipped to stores in-season allowing the Company to get in-season goods in its stores at lower prices.  Packaway merchandise is purchased with the intent that it will be stored in the Company’s warehouses until a later date, which may even be the beginning of the same selling season in the following year.  Packaway purchases are an effective method of increasing the percentage of prestige and national brands at competitive savings within the merchandise assortments.  Packaway merchandise is mainly fashion basics and, therefore, not usually affected by shifts in fashion trends. 

In 2004, the Company continued its emphasis on this important sourcing strategy in response to compelling opportunities available in the marketplace.  Packaway accounted for approximately 43% of total inventories as of January 29, 2005, remaining flat compared to the prior year.  It is management’s belief that the strong discounts the Company is able to offer on packaway merchandise are a key driver of the Company’s business.

The Company utilizes analytical processes for regionalized merchandise buying and allocation.  The goal is to fine-tune the merchandise mix and raise gross profit margins and sales productivity, especially in markets that are performing below the Company average.  These analytical processes also provide the Company with the tools to help maximize new store productivity in new markets.  All merchandise departments are utilizing these analytical processes, with the exception of fine jewelry which is planned on a store specific basis. 

The Company’s buying offices are located in New York City and Los Angeles, the nation’s two largest apparel markets.  These strategic locations allow the Company’s buyers to be in the market on a daily basis, sourcing opportunities and negotiating purchases with vendors and manufacturers.  These locations also enable the Company’s buyers to strengthen vendor relationships -- a key element in the success of its off-price buying strategies. 

3