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ROST > SEC Filings for ROST > Form 10-Q on 12-Jun-2013All Recent SEC Filings

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Form 10-Q for ROSS STORES INC


12-Jun-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

This section and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A (Risk Factors) below. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for 2012. All information is based on our fiscal calendar.

Overview

Ross Stores, Inc. operates two brands of off-price retail apparel and home fashion stores -- Ross Dress for Less® ("Ross") and dd's DISCOUNTS®. Ross is the largest off-price apparel and home fashion chain in the United States with 1,112 locations in 33 states, the District of Columbia and Guam as of May 4, 2013. Ross offers first-quality, in-season, name brand and designer apparel, accessories, footwear, and home fashions for the entire family at everyday savings of 20% to 60% off department and specialty store regular prices. We also operate 115 dd's DISCOUNTS stores in nine states that feature a more moderately-priced assortment of first-quality, in-season, name brand apparel, accessories, footwear, and home fashions for the entire family at everyday savings of 20% to 70% off moderate department and discount store regular prices as of May 4, 2013.

Results of Operations

The following table summarizes the financial results for the three month periods
ended May 4, 2013 and April 28, 2012:
                                                       Three Months Ended
                                                May 4, 2013        April 28, 2012
Sales
Sales (millions)                              $       2,540      $          2,357
Sales growth                                            7.8 %                13.6 %
Comparable store sales growth                             3 %                   9 %

Costs and expenses (as a percent of sales)
Cost of goods sold                                     70.8 %                71.3 %
Selling, general and administrative                    14.3 %                14.3 %
Interest expense, net                                   0.0 %                 0.1 %

Earnings before taxes (as a percent of sales)          14.9 %                14.3 %

Net earnings (as a percent of sales)                    9.2 %                 8.9 %


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
Store Count             May 4, 2013    April 28, 2012
Beginning of the period       1,199             1,125
Opened in the period             28                23
Closed in the period              -                (2 )
End of the period             1,227             1,146

Sales. Sales for the three month period ended May 4, 2013 increased $183.1 million, or 8%, compared to the three month period ended April 28, 2012, due to the opening of 81 net new stores between April 28, 2012 and May 4, 2013 and a 3% increase in "comparable" store sales (defined as stores that have been open for more than 14 complete months).

Our sales mix for the three month periods ended May 4, 2013 and April 28, 2012 is shown below:

                                                           Three Months Ended
                                                    May 4, 2013     April 28, 2012
Ladies                                                       31 %               31 %
Home accents and bed and bath                                22 %               23 %
Shoes                                                        14 %               14 %
Accessories, lingerie, fine jewelry, and fragrances          13 %               12 %
Men's                                                        12 %               12 %
Children's                                                    8 %                8 %
Total                                                       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 month period ended May 4, 2013, we cannot be sure that they will result in a continuation of sales growth or in an increase in net earnings.

Cost of goods sold. Cost of goods sold for the three month period ended May 4, 2013 increased $120 million compared to the same period in the prior year mainly due to increased sales from the opening of 81 net new stores between April 28, 2012 and May 4, 2013 and a 3% increase in comparable store sales.

Cost of goods sold as a percentage of sales for the three month period ended May 4, 2013 decreased about 45 basis points from the same period in the prior year. This improvement was driven primarily by a 50 basis point increase in merchandise margin, which included a five basis point benefit from a lower inventory shortage accrual. In addition, freight and distribution expenses improved by approximately 10 basis points each. These favorable trends were partially offset by 15 basis points in higher buying costs and an increase in occupancy expense of 10 basis points.

We cannot be sure that the gross profit margins realized for the three month period ended May 4, 2013 will continue in the future.

Selling, general and administrative expenses. For the three month period ended May 4, 2013, selling, general and administrative expenses ("SG&A") increased $24 million compared to the same period in the prior year, mainly due to increased store operating costs reflecting the opening of 81 net new stores between April 28, 2012 and May 4, 2013.


Selling, general and administrative expenses as a percentage of sales for the three month period ended May 4, 2013 decreased by approximately 5 basis points compared to the same period in the prior year, primarily due to leverage on store operating costs from the 3% increase in comparable store sales.

Interest expense, net. Net interest expense as a percentage of sales decreased by approximately 10 basis points for the three month period ended May 4, 2013 compared to the same period in the prior year, primarily due to higher capitalization of construction interest.

Taxes on earnings. Our effective tax rate for the three month periods ended May 4, 2013 and April 28, 2012 was approximately 38%, 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 impacted by changes in law, location of new stores, level of earnings, and the resolution of tax positions with various taxing authorities. We anticipate that our effective tax rate for fiscal 2013 will be about 38%.

Net earnings. Net earnings as a percentage of sales for the three month period ended May 4, 2013 was higher compared to the same period in the prior year, primarily due to lower cost of goods sold, lower interest expense, and lower SG&A expenses as a percentage of sales.

Earnings per share. Diluted earnings per share for the three month period ended May 4, 2013 was $1.07 compared to $0.93 in the prior year period. The 15% increase in diluted earnings per share is attributable to a 12% increase in net earnings and a 3% reduction in weighted average diluted shares outstanding, due to the stock repurchase program.

Financial Condition

Liquidity and Capital Resources

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

                                                   Three Months Ended
($000)                                      May 4, 2013       April 28, 2012
Cash provided by operating activities     $     352,859     $        297,330
Cash used in investing activities              (109,699 )            (71,209 )
Cash used in financing activities              (175,747 )           (134,839 )
Net increase in cash and cash equivalents $      67,413     $         91,282

Operating Activities

Net cash provided by operating activities was $352.9 million and $297.3 million for the three month periods ended May 4, 2013 and April 28, 2012, respectively, and was 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 increase in cash flow from operating activities for the three month periods ended May 4, 2013, compared to the prior year was primarily due to higher net earnings and the timing of payments of certain expenses. The change in total merchandise inventory, net of the change in accounts payable, resulted in a source of cash of approximately $72 million for the three months ended May 4, 2013, compared to a source of cash of approximately $96 million for the three months ended April 28, 2012. Accounts payable leverage (defined as accounts payable divided by merchandise inventory) was 70%, 67%, and 73% as of May 4, 2013, February 2, 2013, and April 28, 2012, respectively. Changes in accounts payable leverage are primarily driven by timing of packaway receipts.


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. We expect to continue to take advantage of packaway inventory opportunities to deliver bargains to our customers.

Changes in packaway inventory levels impact our operating cash flow. As of May 4, 2013, packaway inventory was 45% of total inventory compared to 47% at the end of fiscal 2012. At the end of the first quarter for fiscal 2012, packaway inventory was 45% of total inventory compared to 49% at the end of fiscal 2011.

Investing Activities

Net cash used in investing activities was $109.7 million and $71.2 million for the three month periods ended May 4, 2013 and April 28, 2012, respectively. The increase in cash used for investing activities for the three month period ended May 4, 2013, compared to the three month period ended April 28, 2012 was primarily due to an increase in our capital expenditures.

Our capital expenditures were $97.6 million and $58.0 million for the three month periods ended May 4, 2013 and April 28, 2012, respectively. Our capital expenditures include costs to build or expand distribution centers, development of our new data center, open new stores and improve existing stores, and for various other expenditures related to our information technology systems, buying, and corporate offices. We opened 28 and 23 new stores during the three month periods ended May 4, 2013 and April 28, 2012, respectively. Our buying offices, our current 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 forecast approximately $670 million in capital expenditures for fiscal year 2013. In addition to funding costs for fixtures and leasehold improvements to open both new Ross and dd's DISCOUNTS stores, the upgrade or relocation of existing stores, investments in information technology systems, and for various other expenditures related to our stores, distribution centers, buying and corporate offices, the expected growth in capital expenditures in 2013 is mainly due to our investment over the next two years in two new distribution centers, the purchase of one of our existing leased distribution centers, the relocation of our corporate headquarters and the development of our new data center. We expect to fund these expenditures with available cash and cash flows from operations.

We had no purchases of investments for the three month period ended May 4, 2013. We had purchases of investments of $0.4 million for the three month period ended April 28, 2012. We had proceeds from investments of $0.1 million and $0.6 million for the three month periods ended May 4, 2013 and April 28, 2012, respectively.

Financing Activities

Net cash used in financing activities was $175.7 million and $134.8 million for the three month periods ended May 4, 2013 and April 28, 2012, respectively. For the three month periods ended May 4, 2013 and April 28, 2012, our liquidity and capital requirements were provided by available cash and cash flows from operations.

In January 2013, our Board of Directors approved a two-year $1.1 billion stock repurchase program for fiscal 2013 and 2014.

We repurchased 2.3 million and 2.0 million shares of common stock for aggregate purchase prices of approximately $138.3 million and $110.6 million during the three month periods ended May 4, 2013, and April 28, 2012, respectively. We also acquired 438,098 and 406,304 shares of treasury stock from our employee stock equity compensation programs for aggregate purchase prices of approximately $25.8 million and $23.1 million during the three month periods ended May 4, 2013, and April 28, 2012, respectively.

For the three month periods ended May 4, 2013 and April 28, 2012, we paid dividends of $37.5 million and $31.7 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 2013.

Our existing $600 million unsecured revolving credit facility, as amended in June 2012, expires in June 2017 and contains a $300 million sublimit for issuance of standby letters of credit. Interest on this facility is based on LIBOR plus an applicable margin (currently 112.5 basis points) and is payable quarterly and upon maturity. As of May 4, 2013 we had no borrowings or standby letters of credit outstanding on this facility and 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 May 4,
2013:
                           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         21,192          69,530
Operating leases:
Rent obligations             395,727        760,195        531,186        496,135       2,183,243
Synthetic leases               1,449              -              -              -           1,449
Other synthetic lease
obligations                   70,619              -              -              -          70,619
Purchase obligations       1,915,140         66,038             14              -       1,981,192
Total contractual
obligations              $ 2,392,603     $  845,568     $  550,535     $  667,327     $ 4,456,033

1We have an $87.6 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 held by 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 May 4, 2013, we were in compliance with these covenants.

Off-Balance Sheet Arrangements

Operating leases. We lease our buying offices, our current 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 $0.6 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. We have exercised our option to purchase this distribution center at the expiration of the lease in July 2013. Our $70 million obligation is included in Other synthetic lease obligations in the above table.

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 May 4, 2013, we have approximately $0.3 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. The leases for all three of these warehouses contain renewal provisions. 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 311,000 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 May 4, 2013 we had purchase obligations of approximately $1,981 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 $1,688 million represent purchase obligations of less than one year as of May 4, 2013.

Commercial Credit Facilities

The table below presents our significant available commercial credit facilities
at May 4, 2013:

                                              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. Our existing $600 million unsecured revolving credit facility, as amended in June 2012, expires in June 2017 and contains a $300 million sublimit for issuance of standby letters of credit. Interest on this facility is based on LIBOR plus an applicable margin (currently 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 May 4, 2013 we had no borrowings outstanding or standby 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 May 4, 2013 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 May 4, 2013 and April 28, 2012, we had $33.8 million and $45.3 million, respectively, in standby letters of credit outstanding and $47.2 million and $34.8 million, respectively, in a collateral trust. The standby letters of credit are collateralized by restricted cash and cash equivalents, and the collateral trust consists of restricted cash, cash equivalents, and investments.

Trade letters of credit. We had $41.7 million and $43.1 million in trade letters of credit outstanding at May 4, 2013 and April 28, 2012, respectively.

Dividends. In May 2013, our Board of Directors declared a cash dividend of $.17 per common share, payable on June 28, 2013.

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 first quarter of fiscal 2013, there have been no significant changes to the policies discussed in our Annual Report on Form 10-K for the year ended February 2, 2013.

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.

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 those 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 for Ross and dd's DISCOUNTS. The factors underlying our forecasts are . . .

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