rossstore_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark one)
 
               
    X       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the quarterly period ended October 30, 2010
     
or
     
            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from ________ to ________
     
    Commission file number: 0-14678
 
Ross Stores, Inc.
(Exact name of registrant as specified in its charter)
 
 
Delaware          94-1390387
(State or other jurisdiction of incorporation or   (I.R.S. Employer Identification No.)
organization)    
 
4440 Rosewood Drive, Pleasanton, California   94588-3050
(Address of principal executive offices)   (Zip Code)
 
Registrant's telephone number, including area code   (925) 965-4400
 
Former name, former address and former fiscal year, if   N/A
changed since last report.    
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    X      No         
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    X      No         
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer    X      Accelerated filer            Non-accelerated filer            Smaller reporting company         
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes            No    X   
 
The number of shares of Common Stock, with $.01 par value, outstanding on November 18, 2010 was 19,084,540.


 

PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Condensed Consolidated Statements of Earnings
 
    Three Months Ended   Nine Months Ended
    October 30,   October 31,   October 30,   October 31,
($000, except stores and per share data, unaudited)      2010      2009      2010      2009
Sales     1,874,320   1,744,139      5,720,858   5,204,374
                         
Costs and Expenses                        
     Costs of goods sold     1,365,513     1,284,852     4,167,380     3,864,697
     Selling, general and administrative     312,277     286,511     910,151     844,699
     Interest expense, net     2,232     1,943     7,056     4,989
          Total costs and expenses     1,680,022     1,573,306     5,084,587     4,714,385
                         
Earnings before taxes     194,298     170,833     636,271     489,989
Provision for taxes on earnings     72,920     65,753     243,270     190,115
Net earnings   121,378   $ 105,080       393,001   $ 299,874
                         
Earnings per share                        
     Basic   1.04   $ 0.86      3.32   $ 2.43
     Diluted     1.02   $ 0.84      3.26   $ 2.39
                         
                         
Weighted average shares outstanding (000)                        
     Basic     117,039     122,377     118,494     123,512
     Diluted     119,018     124,648     120,522     125,592
                         
                         
Dividends                        
     Cash dividends declared per share   0.16   $ 0.11      0.32   $ 0.22
                         
                         
Stores open at end of period     1,057     1,008     1,057     1,008
 
See notes to condensed consolidated financial statements.

2
 

 

Condensed Consolidated Balance Sheets
 
     October 30,     January 30,   October 31,
($000, unaudited)       2010         2010       2009
Assets                        
Current Assets                        
     Cash and cash equivalents   732,798     768,343     576,162  
     Short-term investments     1,798       1,754       979  
     Accounts receivable     53,930       44,234       47,496  
     Merchandise inventory     1,048,130       872,498       1,014,638  
     Prepaid expenses and other     66,762       58,618       63,048  
     Deferred income taxes     1,426       -       11,737  
          Total current assets     1,904,844       1,745,447       1,714,060  
Property and Equipment                        
     Land and buildings     241,107       239,688       238,902  
     Fixtures and equipment     1,245,272       1,189,538       1,168,437  
     Leasehold improvements     574,200       536,979       528,067  
     Construction-in-progress     43,836       21,812       19,141  
      2,104,415       1,988,017       1,954,547  
     Less accumulated depreciation and amortization     1,138,224       1,045,018       1,008,813  
          Property and equipment, net     966,191       942,999       945,734  
Long-term investments     16,998       16,848       18,974  
Other long-term assets     74,556       63,339       62,702  
Total assets   2,962,589     $ 2,768,633     $ 2,741,470  
Liabilities and Stockholders’ Equity                        
Current Liabilities                        
     Accounts payable   767,741     $ 658,299     $ 767,771  
     Accrued expenses and other     262,017       259,582       235,605  
     Accrued payroll and benefits     213,103       218,234       193,221  
     Income taxes payable     4,769       51,505       11,275  
     Deferred income taxes     -       2,894       -  
          Total current liabilities     1,247,630       1,190,514       1,207,872  
Long-term debt     150,000       150,000       150,000  
Other long-term liabilities     187,772       174,543       171,666  
Deferred income taxes     92,176       96,283       104,739  
Commitments and contingencies                        
Stockholders’ Equity                        
     Common stock     1,192       1,229       1,240  
     Additional paid-in capital     727,840       681,908       676,935  
     Treasury stock     (45,995
)
    (36,864 )     (36,248 )
     Accumulated other comprehensive income     699       170       187  
     Retained earnings     601,275       510,850       465,079  
Total stockholders’ equity     1,285,011       1,157,293       1,107,193  
Total liabilities and stockholders’ equity   2,962,589     $ 2,768,633     $ 2,741,470  
                         
See notes to condensed consolidated financial statements.
 
 

 

Condensed Consolidated Statements of Cash Flows
 
    Nine Months Ended
    October 30,   October 31,
($000, unaudited)       2010       2009
Cash Flows From Operating Activities              
Net earnings   393,001    $ 299,874  
Adjustments to reconcile net earnings to net cash provided              
by operating activities:              
     Depreciation and amortization     120,123     115,188  
     Stock-based compensation     27,523     19,232  
     Deferred income taxes     (8,427
)
  9,838  
     Tax benefit from equity issuance     11,747     7,773  
     Excess tax benefit from stock-based compensation     (11,466
)
  (6,184 )
     Change in assets and liabilities:              
          Merchandise inventory     (175,632 )   (133,580 )
          Other current assets     (17,840 )   (14,133 )
          Accounts payable     129,111     245,034  
          Other current liabilities     (43,368 )   36,564  
          Other long-term, net     1,989     4,276  
          Net cash provided by operating activities     426,761     583,882  
Cash Flows From Investing Activities              
Additions to property and equipment     (149,659 )   (124,175 )
Proceeds from sales of property and equipment     -     10  
Purchases of investments     (6,842 )   (2,904 )
Proceeds from investments     7,461     23,223  
          Net cash used in investing activities     (149,040 )   (103,846 )
Cash Flows From Financing Activities              
Excess tax benefit from stock-based compensation     11,466     6,184  
Issuance of common stock related to stock plans     29,989     45,392  
Treasury stock purchased     (9,131 )   (5,428 )
Repurchase of common stock     (287,275 )   (229,817 )
Dividends paid     (58,315 )   (41,560 )
          Net cash used in financing activities     (313,266 )    (225,229 )
Net (decrease) increase in cash and cash equivalents     (35,545 )   254,807  
Cash and cash equivalents:              
          Beginning of period     768,343     321,355  
          End of period   732,798   $ 576,162  
Supplemental Cash Flow Disclosures              
Interest paid   4,834   $ 4,834  
Income taxes paid   282,417   $ 166,382  
Non-Cash Investing Activities              
Increase in fair value of investment securities   814   $ 1,462  
  
See notes to condensed consolidated financial statements.
 
 4
 

 

Notes to Condensed Consolidated Financial Statements
 
Three and Nine Months Ended October 30, 2010 and October 31, 2009
(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 30, 2010 and October 31, 2009, the results of operations for the three and nine month periods ended October 30, 2010 and October 31, 2009, and cash flows for the nine month periods ended October 30, 2010 and October 31, 2009. The Condensed Consolidated Balance Sheet as of January 30, 2010, 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 30, 2010. 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 30, 2010.
 
The results of operations for the three and nine month periods ended October 30, 2010 and October 31, 2009 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.
 
Total comprehensive income. The components of total comprehensive income for the three and nine month periods ended October 30, 2010 and October 31, 2009 are as follows (in $000):
 
             
      Three Months Ended   Nine Months Ended  
      October 30,   October 31,   October 30,   October 31,  
           2010       2009       2010       2009  
  Net income   121,378   $  105,080   $ 393,001   $  299,874  
  Change in unrealized gain on investments,                      
  net of taxes   137     375   529     950  
        Total comprehensive income   121,515   $ 105,455   $ 393,530   $ 300,824   
     

Estimated fair value of financial instruments.  The carrying value of cash and cash equivalents, short and long-term investments, accounts receivable, other long-term assets, accounts payable, and other long-term liabilities approximates their estimated fair value.
 
5
 

 

Sales Mix. The Company’s sales mix is shown below for the three and nine month periods ended October 30, 2010 and October 31, 2009:
 
             
      Three Months Ended   Nine Months Ended  
      October 30,   October 31,   October 30,   October 31,  
           2010       2009       2010       2009   
  Ladies   30%   30%   31%   32%  
  Home accents and bed and bath   25%   23%   24%   23%  
  Shoes   12%   12%   12%   12%  
  Men's   12%   12%   12%   12%  
  Accessories, lingerie, fine jewelry, and fragrances   12%   13%   12%   12%  
  Children's   9%   10%   9%   9%  
       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 shown on the Condensed Consolidated Statements of Earnings reflect dividends declared during the periods shown. In January, May, and August 2010 the Company’s Board of Directors declared a quarterly cash dividend of $.16 per common share that was paid in March, June, and September 2010, respectively. In January, May, August, and November 2009, the Company’s Board of Directors declared a quarterly cash dividend of $.11 per common share that was paid in March, June, September, and December 2009, respectively.
 
In November 2010, the Company’s Board of Directors declared a cash dividend of $.16 per common share, payable on December 31, 2010.
 
Provision for litigation costs and other legal proceedings. Like many California retailers, the Company has been named in class action lawsuits regarding wage and hour claims. Class action litigation involving allegations that hourly associates have missed meal and/or rest break periods, as well as allegations of unpaid overtime wages to store managers and assistant store managers at Company stores under state law, remains pending as of October 30, 2010.
 
The Company is also party to various other legal proceedings arising in the normal course of business. Actions filed against the Company include commercial, product, customer, intellectual property, and labor and employment-related claims, including lawsuits in which plaintiffs allege that the Company violated state or federal laws. Actions against the Company are in various procedural stages. Many of these proceedings raise factual and legal issues and are subject to uncertainties.
 
In the opinion of management, the resolution of pending class action litigation and other currently pending legal proceedings is not expected to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
 
 

 

Note B: Investments
 
The amortized cost and fair value of the Company’s available-for-sale securities as of October 30, 2010 were:
 
                                                
      Amortized   Unrealized   Unrealized                      
   ($000)      cost      gains      losses      Fair value       Short-term      Long-term   
  Corporate securities   $ 7,961   $ 796   $ (47
)
 
$ 8,710     $ 801   $ 7,909  
  U.S. Government and agency                                          
  securities     8,473     249     (4 )     8,718       352     8,366  
  Mortgage-backed securities     1,287     81     -       1,368       645     723  
  Total   $  17,721   $  1,126   $  (51 )   $  18,796     $  1,798   $  16,998  
                                             
 
The amortized cost and fair value of the Company’s available-for-sale securities as of January 30, 2010 were:
 
                                             
      Amortized   Unrealized   Unrealized                      
   ($000)      cost      gains      losses      Fair value       Short-term      Long-term   
  Auction-rate securities   $ 1,050   $ -         $ (158 )   $ 892     $ -   $ 892  
  Corporate securities     9,704     567     (67 )     10,204       1,073     9,131  
  U.S. Government and agency                                          
  securities     5,247     30     (187 )     5,090       -     5,090  
  Mortgage-backed securities     2,340     79     (3 )     2,416       681     1,735  
  Total   $  18,341   $  676   $  (415 )   $  18,602     $  1,754   $  16,848  
                                             
 
The amortized cost and fair value of the Company’s available-for-sale securities as of October 31, 2009 were:
 
                                             
      Amortized   Unrealized   Unrealized                      
   ($000)      cost      gains      losses      Fair value       Short-term      Long-term   
  Auction-rate securities   $ 1,050   $ -         $ -     $ 1,050     $ -   $ 1,050  
  Asset-backed securities     192     1     -       193       193     -  
  Corporate securities     9,700     490     (82 )     10,108       353     9,755  
  U.S. Government and agency                                          
  securities     5,252     33     (151 )     5,134       -     5,134  
  Mortgage-backed securities     3,473     234     (239 )     3,468       433     3,035  
  Total   $  19,667   $  758   $  (472 )   $  19,953     $  979   $  18,974  
                                             
 
Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
 

 

This fair value hierarchy also requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Corporate, U.S. Government and agency, and mortgage-backed securities are classified within Level 1 or Level 2 because these securities are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
 
Assets measured at fair value on a recurring basis as of October 30, 2010 are summarized below:
 
               
            Fair Value Measurements at Reporting Date  
            Quoted            
            Prices in            
            Active   Significant      
            Markets for   Other   Significant  
            Identical   Observable   Unobservable  
      October 30,   Assets   Inputs   Inputs  
   ($000)       2010       (Level 1)       (Level 2)       (Level 3)   
  Corporate securities   $ 8,710   $ -   $ 8,710   $ -  
  U.S. Government and agency securities     8,718   8,718     -     -  
  Mortgage-backed securities     1,368   -     1,368     -  
  Total assets measured at fair value   $  18,796   $  8,718   $  10,078   $ -  
                         
 
Assets measured at fair value on a recurring basis at January 30, 2010 are summarized below:
 
               
            Fair Value Measurements at Reporting Date  
            Quoted              
            Prices in              
            Active   Significant        
            Markets for   Other   Significant  
            Identical   Observable   Unobservable  
      January 30,   Assets   Inputs   Inputs  
   ($000)       2010       (Level 1)       (Level 2)       (Level 3)   
  Auction-rate securities   $ 892   $ -   $ -   $ 892  
  Corporate securities     10,204     -     10,204     -  
  U.S. Government and agency securities     5,090     5,090     -     -  
  Mortgage-backed securities     2,416     -     2,416     -  
  Total assets measured at fair value   $  18,602   $  5,090   $  12,620   $  892  
                             

8
 

 

Assets measured at fair value on a recurring basis at October 31, 2009 are summarized below:
 
                 
            Fair Value Measurements at Reporting Date  
            Quoted              
            Prices in              
            Active   Significant        
            Markets for   Other   Significant  
            Identical   Observable   Unobservable  
      October 31,   Assets   Inputs   Inputs  
   ($000)       2009       (Level 1)       (Level 2)       (Level 3)   
  Auction-rate securities   $ 1,050   $ -   $ -   $ 1,050  
  Asset-backed securities     193     -     193     -  
  Corporate securities     10,108     -     10,108     -  
  U.S. Government and agency securities     5,134     5,134     -     -  
  Mortgage-backed securities     3,468     -     3,468     -  
  Total assets measured at fair value   $  19,953   $  5,134   $  13,769   $  1,050  
                             

The maturities of investment securities at October 30, 2010 were:
 
                 
            Estimated  
   ($000)        Cost Basis       Fair Value   
  Maturing in one year or less   $ 1,745   1,798  
  Maturing after one year through five years     9,028     9,458  
  Maturing after five years through ten years     6,948     7,540  
      $  17,721   18,796  
                 

The underlying assets in the Company’s non-qualified deferred compensation program totaling $62.2 million as of October 30, 2010 (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 $53.3 million as of October 30, 2010. The fair value measurement for funds without quoted market prices in active markets (Level 2) totaled $8.9 million as of October 30, 2010. 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
 
Restricted stock. The Company grants restricted shares to directors, officers and key employees. The market value of restricted shares at the date of grant is amortized to expense ratably over the vesting period of generally three to five years. The unamortized compensation expense at October 30, 2010, January 30, 2010, and October 31, 2009 was $63.6 million, $56.1 million, and $43.4 million, respectively, which is expected to be recognized over a remaining weighted-average period of 2.3 years.
 
9
 

 

For the nine month period ended October 30, 2010, shares purchased by the Company for tax withholding totaled approximately 168,000 and are considered treasury shares which are available for reissuance. As of October 30, 2010, shares subject to repurchase related to unvested restricted stock totaled 2.9 million.
 
               
            Weighted  
            average  
      Number of   grant date  
   (000, except per share data)       shares       fair value   
  Unvested at January 30, 2010   2,568     $ 33.83  
       Awarded   784       43.81  
       Released   (438 )     29.77  
       Forfeited   (48 )     38.15  
                 
  Unvested at October 30, 2010         2,866     $  36.75  
                 

Performance shares. The Company has a performance share award program for senior executives. A performance share award represents a right to receive shares of common stock on a specified settlement date based on the Company’s attainment of a profitability-based performance goal during a performance period. If attained, the common stock then granted vests over a specified remaining service period, generally two years. For the nine month periods ended October 30, 2010 and October 31, 2009, the Company recognized approximately $4.4 million and $3.2 million, respectively, of expense related to performance share awards.
 
Employee stock purchase plan. Under the Employee Stock Purchase Plan (“ESPP”), eligible full-time employees participating in the annual offering period can choose to have up to the lesser of 10% or $21,250 of their annual base earnings withheld to purchase the Company’s common stock. The purchase price of the stock is 85% of the closing market price on the date of purchase. In addition, purchases occur on a quarterly basis (on the last trading day of each calendar quarter). The Company recognizes expense for ESPP purchase rights equal to the value of the 15% discount given on the purchase date.
 
Stock option activity. The following table summarizes stock option activity for the nine month period ended October 30, 2010:
 
                           
                  Weighted        
            Weighted   average        
            average   remaining   Aggregate  
      Number of     exercise   contractual   intrinsic  
   (000, except per share data)       shares         price       term       value  
  Outstanding at January 30, 2010   2,773     $ 25.53            
       Granted   -       -            
       Exercised   (978 )     25.30            
       Forfeited   (6 )     21.18            
  Outstanding at October 30, 2010   1,789     $ 25.66   3.79   $ 59,631  
  Vested and Expected to Vest at October 30, 2010   1,787     $ 25.65   3.78   $ 59,567  
  Exercisable at October 30, 2010   1,685     $  25.12   3.63   $  57,052  
                           

10
 

 

The following table summarizes information about the weighted average remaining contractual life (in years) and the weighted average exercise prices for stock options both outstanding and exercisable as of October 30, 2010 (number of shares in thousands):
 
                           
                    Options outstanding   Options exercisable  
                        Number       Remaining       Exercise       Number       Exercise  
   Exercise price range     of shares   life   price   of shares   price   
  $ 9.88   to   $ 20.90     394   1.62   $ 17.17   394   $ 17.17  
     20.90   to     27.02     363   3.36     24.52   363     24.52  
     27.04   to     28.53     374   4.85     27.79   374     27.79  
     28.55   to     29.42     452   4.13     28.93   452     28.93  
     29.60   to     34.37     206   6.01     32.87   102     31.33  
  $ 9.88   to   $  34.37     1,789   3.79   $ 25.66   1,685   $ 25.12  
                                           

Stock-based compensation. For the three and nine month periods ended October 30, 2010 and October 31, 2009, the Company recognized stock-based compensation expense as follows:
 
             
      Three Months Ended   Nine Months Ended  
      October 30,   October 31,   October 30,   October 31,   
   ($000)         2010         2009         2010         2009  
  Restricted stock and performance awards   $  8,633   $  5,574   $  25,608   $ 16,876  
  ESPP and stock options     637     642     1,915     2,356  
       Total   $  9,270   $  6,216   $  27,523   $  19,232  
                             

Total stock-based compensation recognized in the Company’s Condensed Consolidated Statements of Earnings for the three and nine month periods ended October 30, 2010 and October 31, 2009 is classified as follows:
 
                 
       Three Months Ended   Nine Months Ended  
      October 30,   October 31,   October 30,   October 31,  
   Statements of Earnings Classification ($000)       2010         2009       2010         2009   
  Cost of goods sold   $ 3,882   $ 2,884   $  12,100   $ 8,733  
  Selling, general and administrative     5,388     3,332      15,423     10,499  
       Total   $  9,270   $  6,216   $  27,523   $  19,232  
                             

Note D: Earnings Per Share
 
Basic Earnings Per Share (“EPS”) is computed by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net earnings by the sum of the weighted average number of common shares and dilutive common stock equivalents outstanding during the period. Diluted EPS reflects the total potential dilution that could occur from outstanding equity plan awards, including unexercised stock options and unvested shares of both performance and non-performance based awards of restricted stock.
 
For the three and nine month periods ended October 30, 2010, approximately 2,900 and 1,500 weighted average shares were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive in the periods presented. For the three month period ended October 31, 2009, no weighted average shares were excluded from the calculation of diluted EPS as there were no potentially anti-dilutive shares for the period. For the nine month period ended October 31, 2009, approximately 4,800 weighted average shares were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive.
 
11

 

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  
            Effect of                 Effect of        
            Dilutive                 Dilutive        
            Common                 Common        
      Basic   Stock   Diluted     Basic   Stock   Diluted  
   Shares in (000s)       EPS       Equivalents       EPS       EPS       Equivalents       EPS   
  October 30, 2010                                            
       Shares     117,039     1,979        119,018        118,494     2,028        120,522  
       Amount   $ 1.04   $ (0.02 )   $ 1.02     $ 3.32   $ (0.06 )   $ 3.26  
  October 31, 2009                                            
       Shares      122,377      2,271       124,648       123,512      2,080       125,592  
       Amount   $ 0.86   $ (0.02 )   $ 0.84     $ 2.43   $ (0.04 )   $ 2.39  
                                               

Note E: Debt
 
The Company has a $600 million unsecured revolving credit facility with an expiration date of July 2011 and interest pricing at LIBOR plus 45 basis points. The credit facility contains a $300 million sublimit for issuance of standby letters of credit, of which $230.4 million was available at October 30, 2010. The Company had no borrowings outstanding under this facility as of October 30, 2010, January 30, 2010, or October 31, 2009.
 
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 30, 2010 of approximately $183 million is estimated by obtaining comparable market quotes. The senior notes are subject to prepayment penalties for early payment of principal.
 
Borrowings under the credit facilities and these notes are subject to certain covenants, including interest coverage and other financial ratios. As of October 30, 2010, the Company was in compliance with these covenants.
 
Note F: Taxes on Earnings
 
As of October 30, 2010 and October 31, 2009, the reserves for unrecognized tax benefits (net of federal tax benefits) were $38.1 million and $29.6 million inclusive of $11.3 million and $7.6 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, $31.3 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 $1.5 million.
 
12
 

 

The Company is generally open to audit by the Internal Revenue Service under the statute of limitations for fiscal years 2007 through 2009. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years 2005 through 2009. Certain state tax returns are currently under audit by state tax authorities. The Company does not expect the results of these audits to have a material impact on the consolidated financial statements.
 
Note G: Recently Issued Accounting Standards
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 810 (originally issued as Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)”). Among other items, ASC 810 responds to concerns about the application of certain key provisions of FIN 46(R), including those regarding the transparency of the involvement with variable interest entities. ASC 810 is effective for fiscal years beginning after November 15, 2009. The Company adopted the standard for the interim period ended May 1, 2010. Adoption of ASC 810 did not have a material impact on the Company’s interim consolidated financial statements.
 
13
 

 

Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Stockholders of
Ross Stores, Inc.
Pleasanton, California
 
We have reviewed the accompanying condensed consolidated balance sheets of Ross Stores, Inc. and subsidiaries (the "Company") as of October 30, 2010 and October 31, 2009, and the related condensed consolidated statements of earnings for the three-month and nine-month periods ended October 30, 2010 and October 31, 2009, and cash flows for the nine-month periods ended October 30, 2010 and October 31, 2009. These 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 financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Ross Stores, Inc. and subsidiaries as of January 30, 2010, 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 25, 2010, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 30, 2010, 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
December 7, 2010
 
14
 

 

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 2009. All information is based on our fiscal calendar.
 
Overview
 
We are the second largest off-price apparel and home goods retailer in the United States. As of October 30, 2010, we operated 990 Ross Dress for Less (“Ross”) locations in 27 states and Guam, and 67 dd’s DISCOUNTS stores in six states. Ross offers first-quality, in-season, name brand and designer apparel, accessories, footwear, and home fashions at everyday savings of 20 to 60 percent off department and specialty store regular prices. dd’s DISCOUNTS features a more moderately-priced assortment of first-quality, in-season, name brand apparel, accessories, footwear and home fashions at everyday savings of 20 to 70 percent off moderate department and discount store regular prices.
 
Results of Operations
 
The following table summarizes the financial results for the three and nine month periods ended October 30, 2010 and October 31, 2009:
 
               
      Three Months Ended   Nine Months Ended  
      October 30,   October 31,   October 30,   October 31,  
          2010       2009       2010       2009  
  Sales                          
       Sales (millions)   $ 1,874   $ 1,744   $ 5,721   $ 5,204  
       Sales growth     7.5%     12.1%     9.9%     9.5%  
       Comparable store sales growth     3%     8%     6%     5%  
                             
  Costs and expenses (as a percent of sales)                          
       Cost of goods sold      72.9%      73.7%      72.9%      74.3%  
       Selling, general and administrative     16.6%     16.4%     15.9%     16.2%  
       Interest expense, net     0.1%     0.1%     0.1%     0.1%  
                             
  Earnings before taxes     10.4%     9.8%     11.1%     9.4%  
                             
  Net earnings     6.5%     6.0%     6.9%     5.8%  
                             

15
 

 

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  
          October 30,       October 31,       October 30,       October 31,  
      2010   2009   2010   2009  
  Stores at the beginning of the period   1,036     990   1,005     956    
  Stores opened in the period   22     18   56     56    
  Stores closed in the period   (1 )   -   (4 )   (4 )  
  Stores at the end of the period             1,057               1,008             1,057               1,008    
                           

Sales. Sales for the three month period ended October 30, 2010 increased $130.2 million, or 7%, compared to the three month period ended October 31, 2009, due to the opening of 49 net new stores between October 31, 2009 and October 30, 2010 and an increase in “comparable” store sales (defined as stores that have been open for more than 14 complete months) of 3% on top of an 8% gain last year. Sales for the nine month period ended October 30, 2010 increased $516.5 million, or 10%, compared to the nine month period ended October 31, 2009, due to the opening of 49 net new stores between October 31, 2009 and October 30, 2010 and an increase in comparable store sales of 6% on top of a 5% gain in the prior year.
 
Our sales mix is shown below for the three and nine month periods ended October 30, 2010 and October 31, 2009:
 
             
       Three Months Ended   Nine Months Ended   
          October 30,       October 31,       October 30,       October 31,  
      2010   2009   2010   2009  
  Ladies   30%   30%   31%   32%  
  Home accents and bed and bath   25%   23%   24%   23%  
  Shoes   12%   12%   12%   12%  
  Men's   12%   12%   12%   12%  
  Accessories, lingerie, fine jewelry, and fragrances   12%   13%   12%   12%  
  Children's   9%   10%   9%   9%  
       Total   100%   100%   100%   100%  
                     

We intend to address the competitive climate for off-price apparel and home goods by pursuing and refining our existing strategies and by continuing to strengthen our organization, to diversify our merchandise mix, and to more fully develop our 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 nine month periods ended October 30, 2010, 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. For the three and nine month periods ended October 30, 2010, cost of goods sold increased $80.7 million and $302.7 million, respectively, as compared to the same periods in the prior year mainly due to increased sales from the opening of 49 net new stores between October 31, 2009 and October 30, 2010 and a 3% and 6% increase in comparable store sales for the same respective periods.
 
16
 

 

Cost of goods sold as a percentage of sales for the three month period ended October 30, 2010 decreased approximately 80 basis points from the same period in the prior year. This improvement was driven primarily by an 85 basis point increase in merchandise gross margin. In addition, distribution expenses declined about 50 basis points due in part to the timing of recognition of acquisition, processing, and storage costs related to our packaway inventory balances. Occupancy expense benefited the quarter by about 15 basis points. These favorable comparisons were partially offset by a 60 basis point increase in buying and incentive costs and a 10 basis point increase in freight expense compared to the third quarter of 2009.
 
Cost of goods sold as a percentage of sales for the nine month period ended October 30, 2010 decreased approximately 140 basis points from the same period in the prior year. This improvement was driven primarily by a 100 basis point increase in merchandise gross margin, which included a 15 basis point benefit from lower shortage costs. In addition, occupancy expense leveraged by approximately 35 basis points, and distribution costs declined by about 45 basis points compared to the prior year period. These favorable trends were partially offset by a 15 basis point increase in freight costs and a 25 basis point increase in buying and incentive costs compared to the same period in 2009.
 
We cannot be sure that the gross profit margins realized for the three and nine month periods ended October 30, 2010 will continue in the future.
 
Selling, general and administrative expenses. For the three month and nine month periods ended October 30, 2010, selling, general and administrative expenses increased $25.8 million and $65.5 million, respectively, as compared to the same periods in the prior year, mainly due to increased store operating costs reflecting the opening of 49 net new stores between October 31, 2009 and October 30, 2010.
 
Selling, general and administrative expenses as a percentage of sales for the three month period ended October 30, 2010 increased by approximately 20 basis points over the same period in the prior year primarily due to higher incentive costs.
 
Selling, general and administrative expenses as a percentage of sales for the nine month period ended October 30, 2010 decreased by approximately 30 basis points over the same period in the prior year primarily due to leverage on both store and corporate expenses from gains in comparable store sales.
 
Interest expense, net. Net interest expense increased for the three and nine month periods ended October 30, 2010 by approximately $0.3 million and $2.1 million, respectively, as compared to the same periods in the prior year primarily due to lower capitalization of construction interest and lower investment yields.
 
Taxes on earnings. Our effective tax rate for the three and nine month periods ended October 30, 2010 was approximately 38%. Our effective tax rate for the three and nine month periods ended October 31, 2009 was approximately 39%. These rates represent 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 2010 will be in the range of 38% to 39%.
 
Earnings per share. Diluted earnings per share for the three month period ended October 30, 2010 was $1.02 compared to $0.84 in the prior year period. The 21% increase in diluted earnings per share is attributable to a 16% increase in net earnings and a 5% reduction in weighted average diluted shares outstanding largely due to the repurchase of common stock under our stock repurchase program. Diluted earnings per share for the nine month period ended October 30, 2010 was $3.26 compared to $2.39 in the prior year period. The 36% increase in diluted earnings per share is attributable to a 31% increase in net earnings and a 4% reduction in weighted average diluted shares outstanding largely due to the repurchase of common stock under our stock repurchase program.
 
17
 

 

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, taxes, capital expenditures in connection with opening new stores, and investments in distribution centers and information systems. We also use cash to repurchase stock under our stock repurchase program and to pay dividends.
 
               
      Nine Months Ended  
          October 30,         October 31,    
  ($000)   2010     2009    
  Cash flows provided by operating activities   $ 426,761     $ 583,882    
  Cash flows used in investing activities      (149,040 )      (103,846 )  
  Cash flows used in financing activities     (313,266 )     (225,229 )  
  Net (decrease) increase in cash and cash equivalents   $ (35,545 )   $ 254,807    
                     

Operating Activities
 
Net cash provided by operating activities was $426.8 million for the nine month period ended October 30, 2010 compared to $583.9 million for the nine month period ended October 31, 2009. The primary sources of cash provided by operating activities for the nine month periods ended October 30, 2010 and October 31, 2009 were net earnings plus non-cash expenses for depreciation and amortization and increases in accounts payable. The decrease in cash flow from operating activities for the nine month period ended October 30, 2010 primarily resulted from higher packaway inventory and payment of incentive bonuses. Accounts payable leverage (defined as accounts payable divided by merchandise inventory) decreased from 75% as of January 30, 2010 to 73% as of October 30, 2010. Accounts payable leverage increased from 61% as of January 31, 2009 to 76% as of October 31, 2009.
 
Our primary source of liquidity is the sale of our merchandise inventory. We regularly review the age and condition of our merchandise and are able to maintain current merchandise inventory in our stores through replenishment processes and liquidation of slower-moving merchandise through clearance markdowns.
 
Investing Activities
 
During the nine month periods ended October 30, 2010 and October 31, 2009, our capital expenditures were approximately $149.7 million and $124.2 million, respectively. Our capital expenditures included fixtures and leasehold improvements to open new stores, information technology systems, building or expanding distribution centers, and various other expenditures related to our stores, buying, and corporate offices. We opened 56 new stores on a gross basis during the nine month periods ended October 30, 2010 and October 31, 2009.
 
We are forecasting approximately $200 million in capital expenditures in fiscal year 2010 to fund expenditures for fixtures and leasehold improvements to open new Ross and dd’s DISCOUNTS stores, for the relocation or upgrade of existing stores, for investments in store and merchandising systems, buildings, equipment and systems, and for various buying and corporate office expenditures. We expect to fund these expenditures with available cash and cash flows from operations.
 
18
 

 

Financing Activities
 
During the nine month periods ended October 30, 2010 and October 31, 2009, our liquidity and capital requirements were provided by available cash and cash flows from operations. Our buying offices, our corporate headquarters, one distribution center, one trailer parking lot, three warehouse facilities, and all but two of our store locations are leased and, except for certain leasehold improvements and equipment, do not represent capital investments. We own one distribution center in each of the following cities: Carlisle, Pennsylvania; Moreno Valley, California; and Fort Mill, South Carolina, and one warehouse facility in Fort Mill, South Carolina. 
 
In January 2010, our Board of Directors approved a two-year $750 million stock repurchase program for fiscal 2010 and 2011. We repurchased 5.4 million shares of common stock for an aggregate purchase price of approximately $287.3 million during the nine month period ended October 30, 2010. We repurchased 5.8 million shares of common stock for approximately $229.8 million during the nine month period ended October 31, 2009.
 
For the nine month periods ended October 30, 2010 and October 31, 2009, we paid dividends of $58.3 million and $41.6 million, respectively.
 
Short-term trade credit represents a significant source of financing for merchandise inventory. Trade credit arises from customary payment terms and trade practices with our vendors. We regularly review the adequacy of credit available to us from all sources and expect to be able to maintain adequate trade, bank, and other credit lines to meet our capital and liquidity requirements, including lease payment obligations.
 
Our $600 million credit facility remains in place and available as of October 30, 2010 and expires in July 2011. We plan to renew our credit facility in 2011.
 
We estimate that existing cash balances, cash flows from operations, bank credit lines, and trade credit are adequate to meet operating cash needs, fund our planned capital investments, repurchase common stock, and make quarterly dividend payments for at least the next twelve months.
 
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Contractual Obligations
 
The table below presents our significant contractual obligations as of October 30, 2010:
 
                           
       Less than   1 - 3   3 - 5   After 5         
  ($000)       One Year       Years       Years       Years       Total1  
  Senior Notes   $ -   $ -   $ -   $ 150,000   $ 150,000  
  Interest payment obligations     9,668     19,335     19,335     45,361     93,699  
  Capital leases     34     20     -     -     54  
  Operating leases:                                
       Rent obligations     346,804     670,171     483,356     480,469     1,980,800  
       Synthetic leases     5,997     7,272     -     -     13,269  
       Other synthetic leases     730     57,091     -     -     57,821  
  Purchase obligations     1,234,706     11,142     -     -     1,245,848  
  Total contractual obligations     $  1,597,939     $  765,031     $  502,691     $  675,830     $  3,541,491  
                                   

1We have a $38.1 million liability for unrecognized tax benefits that is included in Other long-term liabilities on our interim condensed consolidated balance sheet. This liability is excluded from the schedule above as the timing of payments cannot be reasonably estimated.
 
Senior notes. We have two series of unsecured senior notes outstanding with various institutional investors for $150 million. The Series A notes totaling $85 million are due in December 2018 and bear interest at a rate of 6.38%. The Series B notes totaling $65 million are due in December 2021 and bear interest at a rate of 6.53%. Interest on these notes is included in Interest payment obligations in the table above. These notes are subject to prepayment penalties for early payment of principal.
 
Borrowings under these notes are subject to certain operating and financial covenants, including maintaining certain interest coverage and other financial ratios. As of October 30, 2010, we were in compliance with these covenants.
 
Capital leases. The obligations under capital leases relate to distribution center equipment and have terms of two to three years.
 
Off-Balance Sheet Arrangements
 
Operating leases. We lease our two buying offices, our corporate headquarters, one distribution center, one trailer parking lot, three warehouse facilities, and all but two of our store locations. Except for certain leasehold improvements and equipment, these leased locations do not represent long-term capital investments.
 
We have lease arrangements for certain equipment in our stores for our point-of-sale (“POS”) hardware and software systems. These leases are accounted for as operating leases for financial reporting purposes. The initial terms of these leases are either two or three years, and we typically have options to renew the leases for two to three one-year periods. Alternatively, we may purchase or return the equipment at the end of the initial or each renewal term. We have guaranteed the value of the equipment of $1.8 million at the end of the respective initial lease terms, which is included in Other synthetic lease obligations in the table above.
 
We lease approximately 181,000 square feet of office space for our corporate headquarters in Pleasanton, California, under several facility leases. The terms for these leases expire between 2014 and 2015 and contain renewal provisions.
 
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We lease approximately 197,000 and 26,000 square feet of office space for our New York City and Los Angeles buying offices, respectively. The lease terms for these facilities expire in 2021 and 2014, respectively, and contain renewal provisions.
 
We lease a 1.3 million square foot distribution center in Perris, California. The land and building for this distribution center are financed under a $70 million ten-year synthetic lease that expires in July 2013. Rent expense on this center is payable monthly at a fixed annual rate of 5.8% on the lease balance of $70 million. At the end of the lease term, we have the option to either refinance the $70 million synthetic lease facility, purchase the distribution center at the amount of the then-outstanding lease obligation, or arrange a sale of the distribution center to a third party. If the distribution center is sold to a third party for less than $70 million, we have agreed under a residual value guarantee to pay the lessor any shortfall amount up to $56 million. The agreement includes a prepayment penalty for early payoff of the lease. Our contractual obligation of $56 million is included in Other synthetic lease obligations in the above tabl e.
 
We have recognized a liability and corresponding asset for the inception date estimated fair value of the residual value guarantee in the amount of $8.3 million for our Perris, California distribution center and $0.9 million for our POS leases. These residual value guarantees are amortized on a straight-line basis over the original terms of the leases. The current portion of the related asset and liability is recorded in Prepaid expenses and other and Accrued expenses and other, respectively, and the long-term portion of the related assets and liabilities is recorded in Other long-term assets and Other long-term liabilities, respectively, in the accompanying condensed consolidated balance sheets.
 
We lease two warehouses in Carlisle, Pennsylvania with one lease expiring in 2013 and the other expiring in 2014. In January 2009, we exercised a three-year option for a 255,000 square foot warehouse in Fort Mill, South Carolina, extending the lease term to February 2013. We also own a 423,000 square foot warehouse also in Fort Mill, South Carolina. All four of these properties are used to store our packaway inventory. We also lease a 10-acre parcel of land that has been developed for trailer parking adjacent to our Perris distribution center.
 
The Perris, California distribution synthetic lease facility described above, as well as our revolving credit facility and senior notes, have covenant restrictions requiring us to maintain certain interest coverage and other financial ratios. In addition, the interest rates under the revolving credit facility may vary depending on actual interest coverage ratios achieved. As of October 30, 2010 we were in compliance with these covenants.
 
Purchase obligations. As of October 30, 2010 we had purchase obligations of $1,246 million. These purchase obligations primarily consist of merchandise inventory purchase orders, commitments related to store fixtures and supplies, and information technology service and maintenance contracts. Merchandise inventory purchase orders of $1,191 million represent purchase obligations of less than one year as of October 30, 2010.
 
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Commercial Credit Facilities
 
The table below presents our significant available commercial credit facilities at October 30, 2010:
 
               
      Amount of Commitment Expiration Per Period   Total  
          Less than       1 - 3       3 – 5       After 5       amount  
  ($000)   1 year   years   years   years   committed  
  Revolving credit facility   $ 600,000     $ --     $ --     $ --   $ 600,000  
       Total commercial commitments      $  600,000      $ --     $ --     $ --      $  600,000  
                                   

Revolving credit facility. We have available a $600 million revolving credit facility with our banks, which contains a $300 million sublimit for issuance of standby letters of credit, of which $230.4 million was available at October 30, 2010. This credit facility which expires in July 2011 has a LIBOR-based interest rate plus an applicable margin (currently 45 basis points) and is payable upon maturity but not less than quarterly. Our borrowing ability under this credit facility is subject to our maintaining certain financial ratios. As of October 30, 2010 we had no borrowings outstanding under this facility and were in compliance with the covenants. We plan to renew our credit facility in 2011.
 
Standby letters of credit. We use standby letters of credit to collateralize certain obligations related to our self-insured workers’ compensation and general liability claims. We had $69.6 million and $65.2 million in standby letters of credit outstanding at October 30, 2010 and October 31, 2009, respectively.
 
Trade letters of credit. We had $48.7 million and $27.9 million in trade letters of credit outstanding at October 30, 2010 and October 31, 2009, respectively.
 
Dividends. In November 2010, our Board of Directors declared a cash dividend of $.16 per common share, payable on December 31, 2010. Our Board of Directors declared quarterly cash dividends of $.16 per common share in January, May, and August 2010, and $.11 per common share in January, May, August, and November 2009.
 
Critical Accounting Policies
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and on various other factors that management believes to be reasonable. Actual results may differ significantly from these estimates. During the third quarter of fiscal 2010, there have been no significant changes to the policies discussed in our Annual Report on Form 10-K for the year ended January 30, 2010.
 
Effects of inflation or deflation. We do not consider the effects of inflation or deflation to be material to our financial position and results of operations.
 
New Accounting Pronouncements
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 810 (originally issued as Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)”). Among other items, ASC 810 responds to concerns about the application of certain key provisions of FIN 46(R), including those regarding the transparency of the involvement with variable interest entities. ASC 810 is effective for fiscal years beginning after November 15, 2009. The adoption of this standard during the interim period ended May 1, 2010 did not have a material impact on our interim consolidated financial statements. 
 
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Forward-Looking Statements
 
This report may contain a number of forward-looking statements regarding, without limitation, planned store growth, new markets, expected sales, projected earnings levels, capital expenditures, and other matters. These forward-looking statements reflect our then current beliefs, projections and estimates with respect to future events and our projected financial performance, operations, and competitive position. The words “plan,” “expect,” “target,” “anticipate,” “estimate,” “believe,” “forecast,” “projected,” “guidance,” “looking ahead” and similar expressions identify forward-looking statements.
 
Future economic and industry trends that could potentially impact revenue, profitability, and growth remain difficult to predict. As a result, our forward-looking statements are subject to risks and uncertainties which could cause our actual results to differ materially from these forward-looking statements and our previous expectations and projections. Refer to Part II, Item 1A in this Quarterly Report on Form 10-Q for a more complete discussion of risk factors. The factors underlying our forecasts are dynamic and subject to change. As a result, any forecasts or forward-looking statements speak only as of the date they are given and do not necessarily reflect our outlook at any other point in time. We disclaim any obligation to update or revise these forward-looking statements.
 
Other risk factors are detailed in our filings with the Securities and Exchange Commission including, without limitation, our Annual Report on Form 10-K for 2009.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 
We are exposed to market risks, which primarily include changes in interest rates. We do not engage in financial transactions for trading or speculative purposes.
 
We occasionally use forward contracts to hedge against fluctuations in foreign currency prices. We had no material outstanding forward contracts as of October 30, 2010.
 
Interest that is payable on our revolving credit facility is based on variable interest rates and is, therefore, affected by changes in market interest rates. As of October 30, 2010, we had no borrowings outstanding under our revolving credit facility. In addition, lease payments under certain of our synthetic lease agreements are determined based on variable interest rates and are, therefore, affected by changes in market interest rates.
 
In addition, we issued unsecured notes to institutional investors in two series: Series A for $85 million accrues interest at 6.38% and Series B for $65 million accrues interest at 6.53%. The amount outstanding under these notes as of October 30, 2010 is $150 million.
 
Interest is receivable on our short and long-term investments. Changes in interest rates may impact interest income recognized in the future, or the fair value of our investment portfolio.
 
A hypothetical 100 basis point increase or decrease in prevailing market interest rates would not have materially impacted our consolidated financial position, results of operations, cash flows, or the fair values of our short- and long-term investments as of and for the three and nine month periods ended October 30, 2010. We do not consider the potential losses in future earnings and cash flows from reasonably possible, near term changes in interest rates to be material.
 
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Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
 
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.
 
Changes in Internal Control Over Financial Reporting
 
There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings
 
The matters under the caption “Provision for litigation costs and other legal proceedings” in Note A of Notes to Condensed Consolidated Financial Statements are incorporated herein by reference.
 
Item 1A. Risk Factors
 
Our Quarterly Report on Form 10-Q for the third quarter of fiscal 2010, and information we provide in our press releases, telephonic reports, and other investor communications, including those on our corporate website, may contain forward-looking statements with respect to anticipated future events and our projected financial performance, operations and competitive position that are subject to risks and uncertainties that could cause our actual results to differ materially from those forward-looking statements and our prior expectations and projections. Refer to Management’s Discussion and Analysis for a more complete identification and discussion of “Forward-Looking Statements.”
 
Our financial condition, results of operations, cash flows, and the performance of our common stock may be adversely affected by a number of risk factors. Risks and uncertainties that apply to both Ross and dd’s DISCOUNTS include, without limitation, the following:
 
We are subject to the economic and industry risks that affect large retailers operating in the United States.
 
Our business is exposed to the risks of a large, multi-store retailer, which must continually and efficiently obtain and distribute a supply of fresh merchandise throughout a large and growing network of stores. These risk factors include:
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We are subject to operating risks as we attempt to execute on our merchandising and growth strategies.
 
The continued success of our business depends, in part, upon our ability to increase sales at our existing store locations, to open new stores, and to operate stores on a profitable basis. Our existing strategies and store expansion programs may not result in a continuation of our anticipated revenue or profit growth. In executing our off-price retail strategies and working to improve efficiencies, expand our store network, and reduce our costs, we face a number of operational risks, including:
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Information regarding shares of common stock we repurchased during the third quarter of fiscal 2010 is as follows:
 
                         
                    Maximum number (or  
                Total number of   approximate dollar  
      Total         shares (or units)   value) of shares (or  
      number of   Average   purchased as part   units) that may yet be  
      shares (or   price paid   of publicly   purchased under the  
      units)   per share   announced plans or   plans or programs  
  Period       purchased1       (or unit)       programs       ($000)2  
  August   451,297   $  50.35   435,600   $ 535,000  
  (8/1/2010-8/28/2010)                      
                         
  September   777,001   $ 54.05   770,688   $ 493,000  
  (8/29/2010-10/2/2010)                      
                         
  October   545,384   $ 57.33   535,345   $ 463,000  
  (10/3/2010-10/30/2010)                      
                         
  Total    1,773,682      $ 54.12    1,741,633      $   463,000  
                         

1We purchased 32,049 of these shares during the quarter ended October 30, 2010 from employees for tax withholding purposes related to vesting of restricted stock grants. All remaining shares were repurchased under our publicly announced stock repurchase program.
 
2In January 2010 our Board of Directors approved a two-year $750 million stock repurchase program for fiscal 2010 and 2011.
 
Item 6. Exhibits
 
Incorporated herein by reference to the list of exhibits contained in the Index to Exhibits within this Report.
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
        ROSS STORES, INC.
    (Registrant)
 
Date: December 8, 2010   By:  /s/ J. Call
      John G. Call
      Senior Vice President, Chief Financial Officer and
      Principal Accounting Officer

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INDEX TO EXHIBITS
 
Exhibit    
Number       Exhibit
3.1   Amendment of Certificate of Incorporation dated May 21, 2004 and Amendment of Certificate of Incorporation dated June 5, 2002 and Corrected First Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Form 10-Q filed by Ross Stores for its quarter ended July 31, 2004.
     
3.2   Amended By-laws, dated August 25, 1994, incorporated by reference to Exhibit 3.2 to the Form 10-Q filed by Ross Stores for its quarter ended July 30, 1994.
     
15   Letter re: Unaudited Interim Financial Information from Deloitte & Touche LLP dated December 7, 2010
     
31.1   Certification of Chief Executive Officer Pursuant to Sarbanes-Oxley Act Section 302(a).
     
31.2   Certification of Chief Financial Officer Pursuant to Sarbanes-Oxley Act Section 302(a).
     
32.1   Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
     
32.2   Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
     
101.INS¹   XBRL Instance Document
     
101.SCH¹   XBRL Taxonomy Extension Schema
     
101.CAL¹   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF¹   XBRL Taxonomy Extension Definition Linkbase
     
101.LAB¹   XBRL Taxonomy Extension Label Linkbase
     
101.PRE¹   XBRL Taxonomy Extension Presentation Linkbase

¹Furnished, not filed.
 
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exhibit15.htm
EXHIBIT 15
 
December 7, 2010
 
Ross Stores, Inc.
Pleasanton, California
 
We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of Ross Stores, Inc. and subsidiaries for the periods ended October 30, 2010 and October 31, 2009, as indicated in our report dated December 7, 2010; because we did not perform an audit, we expressed no opinion on that information.
 
We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended October 30, 2010, is incorporated by reference in Registration Statements No. 333-151116, No. 33-61373, No. 33-51916, No. 33-51896, No. 33-51898, No. 33-41415, No. 33-41413, No. 33-29600, No. 333-56831, No. 333-06119, No. 333-34988, No. 333-51478, and No. 333-115836 of Ross Stores, Inc. and subsidiaries, all on Form S-8.
 
We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statements prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act.
 
Yours truly,
 
/s/Deloitte & Touche LLP
San Francisco, California
 
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exhibit31-1.htm
EXHIBIT 31.1
 
Ross Stores, Inc.
Certification of Chief Executive Officer
Pursuant to Sarbanes-Oxley Act Section 302(a)
 
I, Michael Balmuth, certify that:
 
1.       I have reviewed this Quarterly Report on Form 10-Q of Ross Stores, Inc.;
           
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
       
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
       
4.   The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
       
      (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
      (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
      (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
      (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
       
5.   The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
       
      (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
      (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: December 8, 2010       /s/Michael Balmuth  
    Michael Balmuth
    Vice Chairman and Chief Executive Officer

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exhibit31-2.htm
EXHIBIT 31.2
 
Ross Stores, Inc.
Certification of Chief Financial Officer
Pursuant to Sarbanes-Oxley Act Section 302(a)
 
I, John G. Call, certify that:
 
1.       I have reviewed this Quarterly Report on Form 10-Q of Ross Stores, Inc.;
           
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
       
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
       
4.   The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
       
      (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
      (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
      (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
      (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
       
5.   The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
       
      (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
      (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: December 8, 2010       /s/J. Call  
    John G. Call
    Senior Vice President, Chief Financial Officer and
    Principal Accounting Officer

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exhibit32-1.htm
EXHIBIT 32.1
 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the Quarterly Report of Ross Stores, Inc. (the “Company”) on Form 10-Q for the quarter ended October 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael Balmuth, as Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that, to the best of my knowledge:
 
     (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
 
     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date:     December 8, 2010       /s/Michael Balmuth  
      Michael Balmuth
      Vice Chairman and Chief Executive Officer

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exhibit32-2.htm
EXHIBIT 32.2
 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the Quarterly Report of Ross Stores, Inc. (the “Company”) on Form 10-Q for the quarter ended October 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John G. Call, as Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that, to the best of my knowledge:
 
     (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
 
     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date:     December 8, 2010       /s/J. Call  
      John G. Call
      Senior Vice President, Chief Financial Officer
      and Principal Accounting Officer

33