Overview

We are the second largest off-price apparel and home goods retailer in the United States. At the end of fiscal 2008, we operated 904 Ross Dress for Less ("Ross") locations in 27 states and Guam, and 52 dd's DISCOUNTS stores in four states. Ross offers first-quality, in-season, name brand and designer apparel, accessories, footwear and home fashions at everyday savings of 20% to 60% 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% off moderate department and discount store regular prices.

Our primary objective is to pursue and refine our existing off-price strategies to drive gains in profitability and improved financial returns over the long term. In establishing appropriate growth targets for our business, we closely monitor market share trends for the off-price industry. Total aggregate sales for the five largest off-price retailers in the United States increased 3% during 2008 on top of a 6% increase in 2007. This compares to total national apparel sales which declined 4% during 2008 compared to a 4% increase in 2007, according to data published by the NPD Group, which provides global sales and marketing information on the retail industry.

The macro-economic and retail climate became more difficult as the year progressed in 2008. We believe that the stronger relative sales gains of the off-price retailers during the year reflected the increasing importance of value to consumers, especially as the recessionary headwinds accelerated. Our sales and earnings gains in 2008 benefited from efficient execution of our resilient and flexible off-price business model. Our merchandise and operational strategies are designed to take advantage of the expanding market share of our off-price industry as well as continued customer demand for name brand fashions for the family and home at compelling everyday discounts.

Looking ahead to 2009, we expect the macro-economic pressures to continue, and are planning to maintain tight controls of both inventory levels and operating expenses as part of our strategy to help us maximize our profitability.

We refer to our fiscal years ended January 31, 2009, February 2, 2008, and February 3, 2007 as fiscal 2008, fiscal 2007, and fiscal 2006, respectively. Fiscal 2006 was 53 weeks. Fiscal 2008 and 2007 were 52 weeks.

Results of Operations

The following table summarizes the financial results for fiscal years ended January 31, 2009, February 2, 2008, and February 3, 2007.

                                                        2008       2007       2006
   Sales
        Sales (millions)                             $ 6,486    $ 5,975    $ 5,570
      Sales growth                                       8.6 %      7.3 %     12.7 %
      Comparable store sales growth (52-week basis)        2 %        1 %        4 %

   Costs and expenses (as a percent of sales)
      Cost of goods sold                                76.4 %     77.3 %     77.5 %
      Selling, general and administrative               16.0 %     15.7 %     15.5 %
      Interest income, net                               0.0 %     (0.1 %)    (0.2 %)

   Earnings before taxes (as a percent of sales)         7.6 %      7.1 %      7.2 %

   Net earnings (as a percent of sales)                  4.7 %      4.4 %      4.3 %

                                                             2008   2007   2006
     Stores at the beginning of the period                    890    797    734
     Stores opened in the period                               77     97     66
     Stores closed in the period                             (11)    (4)    (3)
     Stores at the end of the period                          956    890    797

Selling square footage at the end of the period (000) 22,500 21,100 18,600

Sales. Sales for fiscal 2008 increased $510.9 million, or 8.6%, compared to the prior year due to the opening of 66 net new stores during 2008, and a 2% increase in sales from "comparable" stores (defined as stores that have been open for more than 14 complete months). Sales for fiscal 2007 increased $405.0 million, or 7.3%, compared to the same period in the prior year due to the opening of 93 net new stores during 2007, and a 1% increase in sales from comparable stores.

Our sales mix is shown below for fiscal 2008, 2007 and 2006:

                                                             2008 2007 2006
         Ladies                                               32%  32%  33%
         Home accents and bed and bath                        23%  23%  22%
         Men's                                                14%  15%  15%
         Accessories, lingerie, fine jewelry, and fragrances  12%  11%  11%
         Shoes                                                10%  10%  10%
         Children's                                            9%   9%   9%
         Total                                               100% 100% 100%

We expect 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 in fiscal 2008, 2007 and 2006, we cannot be sure that they will result in a continuation of sales growth or an increase in net earnings.

Cost of goods sold. Cost of goods sold in fiscal 2008 increased $338.4 million compared to the prior year mainly due to increased sales from the opening of 66 net new stores during the year, and a 2% increase in sales from comparable stores.

Cost of goods sold as a percentage of sales for fiscal 2008 decreased approximately 90 basis points from the prior year. This improvement was mainly the result of a 100 basis point increase in merchandise gross margin as a percent of sales. In addition, distribution costs for the year improved by about 20 basis points. As a percent of sales, these favorable trends were partially offset by a 10 basis point increase in occupancy expense and a 20 basis point increase in incentive costs.

Cost of goods sold in fiscal 2007 increased $300.7 million compared to the prior year mainly due to increased sales from the opening of 93 net new stores during the year, and a 1% increase in sales from comparable stores.

We cannot be sure that the gross profit margins realized in fiscal 2008, 2007 and 2006 will continue in future years.

Selling, general and administrative expenses. For fiscal 2008, selling, general and administrative expenses ("SG&A") increased $98.5 million compared to the prior year, mainly due to increased store operating costs reflecting the opening of 66 net new stores during the year.

SG&A as a percentage of sales for fiscal 2008 grew by approximately 30 basis points over the prior year. This increase was mainly driven by a 20 basis point increase in store operating expenses and a 10 basis point increase in general and administrative costs as a percent of sales.

For fiscal 2007, SG&A increased $72.9 million compared to the same period in the prior year, mainly due to increased store operating costs reflecting the opening of 93 net new stores during the year.

SG&A as a percentage of sales for fiscal 2007 grew by approximately 15 basis points over the prior year. This increase was mainly driven by a 40 basis point rise in store operating expenses. Store operating costs in 2007 were impacted by minimum wage increases and the de-leveraging effect of the 1% gain in comparable store sales. These cost pressures were partially offset by a 25 basis point decline in other general and administrative costs.

The largest component of SG&A is payroll. The total number of employees, including both full and part-time, as of fiscal year end 2008, 2007, and 2006 was approximately 40,000, 39,100, and 35,800, respectively.

Interest. In fiscal 2008, interest expense decreased by $1.5 million primarily due to higher capitalization of construction interest. In fiscal 2008, interest income decreased by $5.3 million primarily due to lower investment yields as compared to the prior year. As a percentage of sales, the reduction in net interest income in fiscal 2008 decreased pre-tax earnings by approximately 10 basis points compared to the same period in the prior year. The table below shows interest expense and income for fiscal 2008, 2007 and 2006:

            ($ millions)                    2008           2007           2006
            Interest expense              $  8.3        $   9.8        $   2.9
            Interest income                 (8.5 )        (13.8 )        (11.5 )
            Total interest income, net    $ (0.2 )      $  (4.0 )      $  (8.6 )

Taxes on earnings. Our effective tax rate for fiscal 2008, 2007, and 2006 was approximately 38%, 39%, and 39%, respectively, which represents the applicable combined federal and state statutory rates reduced by the federal benefit of state taxes deductible on federal returns. The effective rate is affected by changes in law, location of new stores, level of earnings, and the resolution of tax positions with various taxing authorities. We anticipate that our effective tax rate for fiscal 2009 will be in the range of 38% to 40%.

Net earnings. Net earnings as a percentage of sales for fiscal 2008 were higher compared to fiscal 2007 primarily due to lower cost of goods sold as a percentage of sales, partially offset by higher SG&A expenses as a percentage of sales. Net earnings as a percentage of sales for fiscal 2007 were higher compared to fiscal 2006 primarily due to lower cost of goods sold as a percentage of sales, partially offset by higher SG&A expenses as a percentage of sales.

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, 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.

   ($000)                                                        2008              2007              2006
   Cash flows from operating activities                    $  583,439        $  353,559        $  506,867
   Cash flows used in investing activities                   (218,763 )        (244,743 )        (235,941 )
   Cash flows used in financing activities                   (300,901 )        (218,624 )         (95,305 )
   Net increase (decrease) in cash and cash equivalents    $   63,775        $ (109,808 )      $  175,621

Operating Activities

Net cash provided by operating activities was $583.4 million, $353.6 million and $506.9 million in fiscal 2008, 2007 and 2006, respectively. The primary source of cash provided by operating activities in fiscal 2008, 2007 and 2006 was net earnings plus non-cash expenses for depreciation and amortization.

Working capital (defined as current assets less current liabilities) was $358.5 million at the end of fiscal 2008, compared to $387.4 million at the end of fiscal 2007. The decrease in working capital in fiscal 2008 compared to fiscal 2007 is primarily due to lower average in-store inventories.

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

In fiscal 2008, 2007 and 2006, our capital expenditures were $224.4 million, $236.1 million and $223.9 million, respectively. Our capital expenditures included fixtures and leasehold improvements to open new stores, implement information technology systems, build or expand distribution centers and install material handling equipment and related distribution center systems, and various other expenditures related to our stores, buying and corporate offices. In fiscal 2008 we also purchased land in South Carolina with the intention of building a new distribution center in the future. We opened 77, 97, and 66 new stores in fiscal 2008, 2007 and 2006, respectively, and relocated one store in 2007 and two stores in 2006. In addition, in 2006, we exercised our option to purchase our Fort Mill, South Carolina distribution center from the lessor.

We are forecasting approximately $190 million in capital requirements in 2009 to fund expenditures for fixtures and leasehold improvements to open both new Ross and dd's DISCOUNTS stores, for the relocation, or upgrade of existing stores, for investments in store and merchandising systems, buildings, equipment and systems, and for various buying and corporate office expenditures. We expect to fund these expenditures with cash flows from operations.

Our capital expenditures over the last three years are set forth in the table below:

   ($ millions)                                          2008         2007         2006
   New stores                                         $  52.0      $ 110.1      $  49.5
   Store renovations and improvements                    47.3         32.3         42.4
   Information systems                                   13.2         21.4         13.4
   Distribution centers, corporate office, and other    111.9         72.3        118.6
   Total capital expenditures                         $ 224.4      $ 236.1      $ 223.9

Financing Activities

During fiscal 2008, 2007 and 2006, our liquidity and capital requirements were provided by available cash and investment balances, cash flows from operations, trade credit, and issuance of senior notes. 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 three distribution centers in Carlisle, Pennsylvania, Moreno Valley, California, and Fort Mill, South Carolina.

In January 2008, our Board of Directors approved a two-year $600 million stock repurchase program for fiscal 2008 and 2009. We repurchased 9.3 million shares of common stock for an aggregate purchase price of approximately $300 million in 2008 and expect to complete the remaining purchase of $300 million in 2009. In November 2005, our Board of Directors authorized a stock repurchase program of up to $400 million for 2006 and 2007. We repurchased 6.9 million and 7.1 million shares of common stock for aggregate purchase prices of approximately $200 million in both 2007 and 2006. These repurchases were funded by cash flows from operations.

In January 2009, our Board of Directors declared a quarterly cash dividend payment of $.11 per common share, payable on March 31, 2009. Our Board of Directors declared quarterly cash dividends of $.095 per common share in January, May, August and November 2008, and cash dividends of $.075 per common share in January, May, August, and November 2007.

In March 2006, we repaid our $50 million term debt in full. In October 2006, we entered into a Note Purchase Agreement with various institutional investors for $150 million of unsecured, senior notes. See "Senior Notes" below for more information.

Short-term trade credit represents a significant source of financing for merchandise inventory. Trade credit arises from customary payment terms and trade practices with our vendors. We regularly review the adequacy of credit available to us from all sources and expect to be able to maintain adequate trade, bank and other credit lines to meet our capital and liquidity requirements, including lease payment obligations in 2009.

We estimate that 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.

Contractual Obligations

The table below presents our significant contractual obligations as of January
31, 2009:

 ($000)
                                                                                              Less
                                                                                            than 1             1 - 3             3 - 5           After 5
 Contractual Obligations                                                                      year             years             years             years              Total1
 Senior Notes                                                                        $          -      $          -      $          -       $    150,000     $      150,000
 Interest payment obligations                                                                9,667            19,335            19,335            59,863             108,200
 Capital leases                                                                                389               325                -                 -                  714
 Operating leases:
    Rent obligations                                                                       335,280           613,313           473,209           478,253           1,900,055
    Synthetic leases                                                                         6,542             9,046             6,136                -               21,724
    Other synthetic lease obligations                                                        2,379             1,528            56,000                -               59,907
 Purchase obligations                                                                      620,774               280                -                 -              621,054
 Total contractual obligations                                                       $     975,031     $     643,827     $     554,680      $    688,116     $     2,861,654

1 Pursuant to the guidelines of FIN 48, a $26.0 million reserve for unrecognized tax benefits is included in other long-term liabilities on the Company's consolidated balance sheet. These obligations are excluded from the schedule above as the timing of payments cannot be reasonably estimated.

Senior Notes. We have a Note Purchase Agreement with various institutional investors for $150 million of unsecured, senior notes. The notes were issued in two series and funding occurred in December 2006. The Series A notes, issued for an aggregate of $85 million, are due in December 2018, and bear interest at a rate of 6.38%. The Series B notes, issued for an aggregate of $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.

Borrowings under these notes are subject to certain operating and financial covenants, including maintaining certain interest coverage and other financial ratios. As of January 31, 2009, we were in compliance with these covenants.

Capital leases. The obligations under capital leases relate to distribution center equipment and have a term of two 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 $3.9 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 2010 and 2014 and contain renewal provisions.

We lease approximately 161,000 and 15,000 square feet of office space for our New York City and Los Angeles buying offices, respectively. The lease terms for these facilities expire in 2015 and 2011, respectively. The lease term for the New York office contains a renewal provision.

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. Our contractual obligation of $56 million is included in Other synthetic lease obligations in the above table.

In accordance with Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," we have recognized a liability and corresponding asset for the fair value of the residual value guarantee in the amount of $8.3 million for the Perris, California distribution center and $1.2 million for the POS leases. These residual value guarantees are being amortized on a straight-line basis over the original terms of the leases. The current portion of the related asset and liability is recorded in prepaid expenses and accrued expenses, respectively, and the long-term portion of the related assets and liabilities is recorded in other long-term assets and other long-term liabilities, respectively, in the accompanying consolidated balance sheets.

In November 2001 we entered into a nine-year lease for a 239,000 square foot warehouse and a ten-year lease for a 246,000 square foot warehouse both in Carlisle, Pennsylvania. In January 2009, we exercised a three-year option for a 253,000 square foot warehouse in Fort Mill, South Carolina, extending the term to February 2013. In June 2008, we purchased 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 synthetic lease facilities described above, as well as our revolving credit facility and senior notes, have covenant restrictions requiring us to maintain certain interest coverage and other financial ratios. In addition, the interest rates under these agreements may vary depending on actual interest coverage ratios achieved. As of January 31, 2009, we were in compliance with these covenants.

Purchase obligations. As of January 31, 2009 we had purchase obligations of $621.1 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 $574.0 million represent purchase obligations of less than one year as of January 31, 2009.

Commercial Credit Facilities

The table below presents our significant available commercial credit facilities
at January 31, 2009:

  ($000)                                                       Amount of commitment expiration per period                                Total
                                                       Less than                 1 - 3               3 - 5             After 5          Amount
  Commercial Credit Commitments                           1 year                 years               years               years       Committed
  Revolving credit facility                          $         -           $   600,000           $       -           $       -     $   600,000
  Total commercial commitments                       $         -           $   600,000           $       -           $       -     $   600,000

For additional information relating to this credit facility, refer to Note D of Notes to the Consolidated Financial Statements.

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