This section and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A (Risk Factors) below. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for 2011. All information is based on our fiscal calendar.

Overview

Ross Stores, Inc. operates two brands of off-price retail apparel and home fashion stores -- Ross Dress for Less® ("Ross") and dd's DISCOUNTS®. Ross is the largest off-price apparel and home fashion chain in the United States with 1,097 locations in 33 states, the District of Columbia and Guam, as of October 27, 2012. Ross offers first-quality, in-season, name brand and designer apparel, accessories, footwear, and home fashions for the entire family at everyday savings of 20% to 60% off department and specialty store regular prices. As of October 27, 2012, we also operate 108 dd's DISCOUNTS stores in eight states that feature a more moderately-priced assortment of first-quality, in-season, name brand apparel, accessories, footwear, and home fashions for the entire family at everyday savings of 20% to 70% off moderate department and discount store regular prices.

Results of Operations

The following table summarizes the financial results for the three and nine
month periods ended October 27, 2012 and October 29, 2011:
                                             Three Months Ended                    Nine Months Ended
                                        October 27,        October 29,        October 27,       October 29,
                                               2012               2011               2012              2011
Sales
Sales (millions)                     $        2,263      $       2,046     $        6,960     $       6,210
Sales growth                                   10.6 %              9.2 %             12.1 %             8.6 %
Comparable store sales growth                     6 %                5 %                7 %               5 %

Costs and expenses (as a percent of
sales)
Cost of goods sold                             72.9 %             72.8 %             72.1 %            72.4 %
Selling, general and administrative            15.8 %             16.2 %             15.1 %            15.5 %
Interest expense, net                           0.1 %              0.1 %              0.1 %             0.1 %

Earnings before taxes (as a percent
of sales)                                      11.2 %             10.8 %             12.8 %            12.0 %

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

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 27,    October 29,     October 27,     October 29,
Store Count                    2012           2011            2012            2011
Beginning of the period       1,174          1,091           1,125           1,055
Opened in the period             31             39              82              80
Closed in the period              -             (4 )            (2 )            (9 )
End of the period             1,205          1,126           1,205           1,126

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

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

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

                                          Three Months Ended               Nine Months Ended
                                     October 27,     October 29,     October 27,     October 29,
                                            2012            2011            2012            2011
Ladies                                        29 %            29 %            30 %            31 %
Home accents and bed and bath                 23 %            24 %            23 %            24 %
Accessories, lingerie, fine jewelry,
and fragrances                                14 %            13 %            13 %            12 %
Shoes                                         13 %            13 %            13 %            13 %
Men's                                         12 %            12 %            13 %            12 %
Children's                                     9 %             9 %             8 %             8 %
Total                                        100 %           100 %           100 %           100 %

We intend to address the competitive climate for off-price apparel and home goods by pursuing and refining our existing strategies and by continuing to strengthen our organization, diversify our merchandise mix, and more fully develop our organization and systems to improve regional and local merchandise offerings. Although our strategies and store expansion program contributed to sales gains for the three and nine month periods ended October 27, 2012, we cannot be sure that they will result in a continuation of sales growth or in an increase in net earnings.

Cost of goods sold. Cost of goods sold for the three and nine month periods ended October 27, 2012 increased $158.8 million and $522.0 million compared to the same periods in the prior year mainly due to increased sales from the opening of 79 net new stores between October 29, 2011 and October 27, 2012 and a 6% and 7% increase in comparable store sales, respectively.

Cost of goods sold as a percentage of sales for the three month period ended October 27, 2012 increased about five basis points over the prior year. The slight increase in cost of goods sold consisted of 30 basis points of higher merchandise margin, 15 basis points of leverage on occupancy costs, and distribution expenses that declined approximately 45 basis points. The latter was mainly due to favorable timing of packaway-related processing costs. These improvements were offset by 45 basis points from a lower shortage benefit than the prior year and buying and freight expenses that increased 25 basis points each.

Cost of goods sold as a percentage of sales for the nine month period ended October 27, 2012 decreased approximately 30 basis points from the same period in the prior year. This improvement was due primarily to a 30 basis point increase in merchandise gross margin inclusive of inventory shortage and 20 basis points of leverage on occupancy costs. Distribution expenses as a percent of sales also declined approximately 25 basis points compared to the prior year period, due in part to the timing of packaway-related processing costs. These favorable items were partially offset by increases in buying and freight costs of 30 and 15 basis points, respectively.

We cannot be sure that the gross profit margins realized for the three and nine month periods ended October 27, 2012 will continue in the future.

Selling, general and administrative expenses. For the three and nine month periods ended October 27, 2012, selling, general and administrative expenses increased $25.8 million and $85.6 million compared to the same periods in the prior year, mainly due to increased store operating costs reflecting the opening of 79 net new stores between October 29, 2011 and October 27, 2012.

Selling, general and administrative expenses as a percentage of sales for the three and nine month periods ended October 27, 2012 decreased by approximately 40 and 45 basis points, respectively, over the same periods in the prior year primarily due to leverage on store operating costs from the strong gains in comparable store sales.

Interest expense, net. Net interest expense as a percentage of sales remained flat for the three and nine month periods ended October 27, 2012 compared to the same periods in the prior year.

Taxes on earnings. Our effective tax rate for the three month periods ended October 27, 2012 and October 29, 2011 was approximately 37% and 35%, respectively. The effective tax rate for the three months ended October 29, 2011 was impacted by favorable resolution of certain tax positions. Our effective tax rate for the nine month periods ended October 27, 2012 and October 29, 2011 was approximately 38%, and represents the applicable combined federal and state statutory rates reduced by the federal benefit of state taxes deductible on federal returns. The effective rate is impacted by changes in law, location of new stores, level of earnings, and the resolution of tax positions with various taxing authorities. We anticipate that our effective tax rate for fiscal 2012 will be approximately 38%.

Earnings per share. Diluted earnings per share for the three month period ended October 27, 2012 was $0.72 compared to $0.63 in the prior year period. The 14% increase in diluted earnings per share is attributable to an 11% increase in net earnings and a 3% 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 27, 2012 was $2.46 compared to $2.01 in the prior year period. The 22% increase in diluted earnings per share is attributable to an 18% increase in net earnings and a 3% reduction in weighted average diluted shares outstanding largely due to the stock buyback program.

All share and per share amounts have been adjusted for the two-for-one stock split effective December 15, 2011.

Financial Condition

Liquidity and Capital Resources

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

                                                     Nine Months Ended
($000)                                     October 27, 2012     October 29, 2011
Cash provided by operating activities     $        646,270     $        413,691
Cash used in investing activities                 (256,959 )           (286,889 )
Cash used in financing activities                 (415,324 )           (407,802 )
Net decrease in cash and cash equivalents $        (26,013 )   $       (281,000 )

Operating Activities

Net cash provided by operating activities was $646.3 million and $413.7 million for the nine month periods ended October 27, 2012 and October 29, 2011, respectively. Cash provided by operating activities for the nine month periods ended October 27, 2012 and October 29, 2011 were primarily driven by net earnings excluding non-cash expenses for depreciation and amortization. Our primary source of operating cash flow 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.

The change in total merchandise inventory, net of the change in accounts payable, resulted in a use of cash of approximately $56 million for the nine months ended October 27, 2012, compared to a use of cash of approximately $128 million for the nine months ended October 29, 2011. Accounts payable leverage (defined as accounts payable divided by merchandise inventory) was 66%, 67%, and 62% as of October 27, 2012, January 28, 2012, and October 29, 2011, respectively. Changes in accounts payable leverage are primarily driven by timing of packaway receipts.

We expect to continue to take advantage of packaway inventory opportunities to deliver bargains to our customers. As a regular part of our business, packaway inventory levels will vary over time based on availability of compelling opportunities in the marketplace. Packaway merchandise is purchased with the intent that it will be stored in our warehouses until a later date. The timing of the release of packaway inventory to our stores is principally driven by the product mix and seasonality of the merchandise, and its relation to our store merchandise assortment plans. As such, the aging of packaway varies by merchandise category and seasonality of purchase, but typically packaway remains in storage less than six months.

Changes in packaway inventory levels impact our operating cash flow. As of October 27, 2012, packaway inventory was 46% of total inventory compared to 49% at the end of fiscal 2011. At the end of the third quarter for fiscal 2011, packaway inventory was 43% of total inventory compared to 47% at the end of fiscal 2010.

Investing Activities

Net cash used in investing activities was approximately $257.0 million and $286.9 million for the nine month periods ended October 27, 2012 and October 29, 2011, respectively. The decrease in cash used for investing activities for the nine month period ended October 27, 2012, compared to the nine month period ended October 29, 2011 was primarily due to a transfer of funds in the second quarter of 2011 into restricted accounts to serve as collateral for our insurance obligations, partially offset by higher capital expenditures during the nine month period ended October 27, 2012.

Our capital expenditures were approximately $255.3 million and $231.3 million, for the nine month periods ended October 27, 2012 and October 29, 2011, respectively. Our capital expenditures include costs for fixtures and leasehold improvements to open new stores and improve existing stores, costs to implement information technology systems, build or expand distribution centers, and various other expenditures related to our stores, distribution centers, buying, and corporate offices. We opened 82 and 80 new stores on a gross basis during the nine month periods ended October 27, 2012 and October 29, 2011, respectively. Our buying offices, our corporate headquarters, one distribution center, one trailer parking lot, three warehouse facilities, and all but three of our store locations are leased and, except for certain leasehold improvements and equipment, do not represent capital investments.

We are forecasting approximately $430 million to $440 million of capital expenditures in fiscal year 2012 to fund fixtures and leasehold improvements to open both new Ross and dd's DISCOUNTS stores, for the upgrade or relocation of existing stores, for investments in information technology systems, to build or expand distribution centers, and for various other expenditures related to our stores, distribution centers, buying and corporate offices. We expect to fund these expenditures with available cash and cash flows from operations.

We purchased $0.4 million of investments for the nine month period ended October 27, 2012. We had no purchases of investments for the nine month period ended October 29, 2011. We had proceeds from investments of $0.8 million and $11.0 million for the nine month periods ended October 27, 2012 and October 29, 2011, respectively.

Financing Activities

Net cash used in financing activities was $415.3 million and $407.8 million for the nine month periods ended October 27, 2012 and October 29, 2011. For the nine month periods ended October 27, 2012 and October 29, 2011, our liquidity and capital requirements were provided by available cash and cash flows from operations.

We repurchased 5.4 million and 9.0 million shares of common stock for aggregate purchase prices of approximately $334.4 million and $342.7 million during the nine month periods ended October 27, 2012, and October 29, 2011, respectively. In January 2011, our Board of Directors approved a two-year $900 million stock repurchase program for fiscal 2011 and 2012.

For the nine month periods ended October 27, 2012 and October 29, 2011, we paid dividends of $94.6 million and $77.0 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 in 2012.

In June 2012, we amended our existing $600 million unsecured revolving credit facility. The amended credit facility expires in June 2017 and contains a $300 million sublimit for issuance of standby letters of credit. Interest on this facility is based on LIBOR plus an applicable margin (currently 112.5 basis points) and is payable upon maturity but not less than quarterly. We had no borrowings or letters of credit outstanding on this facility as of October 27, 2012 and October 29, 2011, respectively. As of October 27, 2012, our $600 million credit facility remains in place and available.

We estimate that existing cash balances, cash flows from operations, bank credit lines, and trade credit are adequate to meet our operating cash needs and to fund our planned capital investments, common stock repurchases, and quarterly dividend payments for at least the next twelve months.

Contractual Obligations

The table below presents our significant contractual obligations as of
October 27, 2012:
                           Less than          1 - 3          3 - 5        After 5
($000)                      one year          years          years          years          Totalą
Senior notes             $         -     $        -     $        -     $  150,000     $   150,000
Interest payment
obligations                    9,668         19,335         19,335         26,026          74,364
Operating leases:
Rent obligations             386,428        726,310        504,576        487,612       2,104,926
Synthetic leases               3,253              -              -              -           3,253
Other synthetic lease
obligations                   56,791              -              -              -          56,791
Purchase obligations       1,603,862          3,017             82              -       1,606,961
Total contractual
obligations              $ 2,060,002     $  748,662     $  523,993     $  663,638     $ 3,996,295

1We have a $60.3 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 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 interest coverage and other financial ratios. As of October 27, 2012, we were in compliance with these covenants.

Off-Balance Sheet Arrangements

Operating leases. We lease our buying offices, corporate headquarters, one distribution center, one trailer parking lot, three warehouse facilities, and all but three 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 $0.8 million at the end of the respective initial lease terms, which is included in Other synthetic lease obligations in the table above.

We lease a 1.3 million square foot distribution center in Perris, California. The land and building for this distribution center are financed by the lessor 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 synthetic lease 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 table. We intend to purchase this distribution center at the expiration of the lease in 2013.

We have also recognized a liability and corresponding asset for the inception date estimated fair values of the distribution center and POS synthetic lease residual value guarantees. As of October 27, 2012, we have approximately $0.7 million of residual value guarantee asset and liability. 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 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 condensed consolidated balance sheets.

We lease three warehouses. Two of the warehouses are in Carlisle, Pennsylvania with leases expiring in 2014 and 2016. The third warehouse is in Fort Mill, South Carolina, with a lease expiring in 2016. We also own a 423,000 square foot warehouse in Fort Mill, South Carolina and a 449,000 square foot warehouse in Riverside, California. All five of these warehouses are used to store our packaway inventory. We also lease a 10-acre parcel that has been developed for trailer parking adjacent to our Perris, California distribution center expiring in 2017.

We lease approximately 192,000 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.

We lease approximately 265,000 and 52,000 square feet of office space for our New York City and Los Angeles buying offices, respectively. The lease terms for these facilities expire in 2022 and 2017, respectively, and contain renewal provisions.

Purchase obligations. As of October 27, 2012 we had purchase obligations of approximately $1,607 million. These purchase obligations primarily consist of merchandise inventory purchase orders, commitments related to construction projects, store fixtures and supplies, and information technology service and maintenance contracts. Merchandise inventory purchase orders of $1,440 million represent purchase obligations of less than one year as of October 27, 2012.

Commercial Credit Facilities

The table below presents our significant available commercial credit facilities
at October 27, 2012:

                                           Amount of Commitment Expiration Per Period
                              Less than 1                                                                    Total amount
($000)                               year           1 - 3 years       3 - 5 years        After 5 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 E of Notes to Condensed Consolidated Financial Statements.

Revolving credit facility. In June 2012, we amended our existing $600 million unsecured revolving credit facility. The amended credit facility expires in June 2017 and contains a $300 million sublimit for issuance of standby letters of credit. Interest on this facility is based on LIBOR plus an applicable margin (currently 112.5 basis points) and is payable upon maturity but not less than quarterly. Our borrowing ability under this credit facility is subject to our maintaining certain financial ratios. As of October 27, 2012 we had no borrowings outstanding or letters of credit issued under this facility and were in compliance with the covenants.

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 the revolving credit facility may vary depending on actual interest coverage ratios achieved. As of October 27, 2012 we were in compliance with these covenants.

Standby letters of credit and collateral trust. We use standby letters of credit outside of our revolving credit facility in addition to a funded trust to collateralize our insurance obligations. As of October 27, 2012 and October 29, 2011, we had $33.8 million and $45.5 million, respectively, in standby letters of credit outstanding which are collateralized by restricted cash and cash equivalents and $34.9 million and $21.1 million, respectively, in a collateral trust consisting of restricted cash, cash equivalents, and investments.

. . .