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ROST > SEC Filings for ROST > Form 10-Q on 11-Dec-2013All Recent SEC Filings

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Form 10-Q for ROSS STORES INC


11-Dec-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 1,154 locations in 33 states, the District of Columbia and Guam as of November 2, 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 131 dd's DISCOUNTS stores in 10 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 November 2, 2013.

Results of Operations

The following table summarizes the financial results for the three and nine
month periods ended November 2, 2013 and October 27, 2012:
                                          Three Months Ended                      Nine Months Ended
                                     November 2,        October 27,          November 2,       October 27,
                                            2013               2012                 2013              2012
Sales
Sales (millions)                  $        2,398      $       2,263       $        7,489     $       6,960
Sales growth                                 6.0 %             10.6 %                7.6 %            12.1 %
Comparable store sales growth                  2 %                6 %                  3 %               7 %

Costs and expenses (as a percent
of sales)
Cost of goods sold                          72.8 %             72.9 %               71.7 %            72.1 %
Selling, general and
administrative                              15.9 %             15.8 %               15.0 %            15.1 %
Interest (income) expense, net               0.0 %              0.1 %                0.0 %             0.1 %

Earnings before taxes (as a
percent of sales)                           11.3 %             11.2 %               13.3 %            12.8 %

Net earnings (as a percent of
sales)                                       7.2 %              7.1 %                8.3 %             7.9 %


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                Nine Months Ended
                        November 2,     October 27,      November 2,     October 27,
Store Count                    2013            2012             2013            2012
Beginning of the period       1,253           1,174            1,199           1,125
Opened in the period             33              31               88              82
Closed in the period             (1 )             -               (2 )            (2 )
End of the period             1,285           1,205            1,285           1,205

Sales. Sales for the three month period ended November 2, 2013 increased $135.4 million, or 6%, compared to the three month period ended October 27, 2012, due to the opening of 80 net new stores between October 27, 2012 and November 2, 2013 and a 2% increase in "comparable" store sales (defined as stores that have been open for more than 14 complete months).

Sales for the nine month period ended November 2, 2013 increased $528.9 million, or 8%, compared to the nine month period ended October 27, 2012, due to the opening of 80 net new stores between October 27, 2012 and November 2, 2013 and a 3% increase in "comparable" store sales.

Our sales mix for the three and nine month periods ended November 2, 2013 and October 27, 2012 is shown below:

                                            Three Months Ended                   Nine Months Ended
                                                         October 27,       November 2,     October 27,
                                    November 2, 2013            2012              2013            2012
Ladies                                            30 %            29 %              31 %            30 %
Home accents and bed and bath                     24 %            23 %              23 %            23 %
Shoes                                             13 %            13 %              13 %            13 %
Accessories, lingerie, fine
jewelry, and fragrances                           13 %            14 %              13 %            13 %
Men's                                             12 %            12 %              12 %            13 %
Children's                                         8 %             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 November 2, 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 and nine month periods ended November 2, 2013 increased $97 million and $351 million compared to the same periods in the prior year, mainly due to increased sales from the opening of 80 net new stores between October 27, 2012 and November 2, 2013 and a 2% and 3% increase in comparable store sales, respectively.

Cost of goods sold as a percentage of sales for the three month period ended November 2, 2013 decreased approximately 5 basis points from the same period in the prior year. This improvement was primarily due to a 55 basis point increase in merchandise margin, which was partially offset by a lower shortage benefit of approximately 35 basis points and higher occupancy cost of approximately 15 basis points.


Cost of goods sold as a percentage of sales for the nine month period ended November 2, 2013 decreased approximately 40 basis points from the same period in the prior year. This improvement was primarily due to a 60 basis point increase in merchandise margin which was partially offset by a lower shortage benefit of approximately 10 basis points and 5 basis points each of higher occupancy and buying and incentive costs.

We cannot be sure that the gross profit margins realized for the three and nine month periods ended November 2, 2013 will continue in the future.

Selling, general and administrative expenses. For the three and nine month periods ended November 2, 2013, selling, general and administrative expenses ("SG&A") increased $24 million and $77 million compared to the same periods in the prior year mainly due to increased store operating costs reflecting the opening of 80 net new stores between October 27, 2012 and November 2, 2013.

Selling, general and administrative expenses as a percentage of sales for the three month period ended November 2, 2013 increased 10 basis points mainly due to deleveraging on expenses from the 2% increase in comparable store sales. Selling, general and administrative expenses as a percentage of sales for the nine month period ended November 2, 2013 declined 5 basis points compared to the prior year due to leverage on store operating costs from the 3% increase in comparable store sales.

Interest (income) expense, net. Net interest income as a percentage of sales improved by approximately 10 basis points for the three and nine month periods ended November 2, 2013 compared to the same periods in the prior year primarily due to higher capitalization of construction interest.

Taxes on earnings. Our effective tax rates for the three month periods ended November 2, 2013 and October 27, 2012 were approximately 36% and 37%, respectively, and our effective tax rate for both the nine month periods ended November 2, 2013 and October 27, 2012 was approximately 38%. Our effective tax rate 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 approximately 38%.

Net earnings. Net earnings as a percentage of sales for the three month period ended November 2, 2013 was higher compared to the same period in the prior year primarily due to lower cost of goods sold and partially offset by higher SG&A expenses. Net earnings as a percentage of sales for the nine month period ended November 2, 2013 was higher compared to the same period in the prior year primarily due to lower cost of goods sold and lower SG&A.

Earnings per share. Diluted earnings per share for the three month period ended November 2, 2013 was $0.80 compared to $0.72 in the prior year period. The 11% increase in diluted earnings per share is attributable to a 8% increase in net earnings and a 3% reduction in weighted average diluted shares outstanding due to the stock repurchase program. Diluted earnings per share for the nine month period ended November 2, 2013 was $2.86 compared to $2.46 in the prior year period. The 16% increase in diluted earnings per share is attributable to a 13% 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.


                                                      Nine Months Ended
($000)                                      November 2, 2013      October 27, 2012
Cash provided by operating activities     $          681,221     $         646,270
Cash used in investing activities                   (436,905 )            (256,959 )
Cash used in financing activities                   (518,807 )            (415,324 )
Net decrease in cash and cash equivalents $         (274,491 )   $         (26,013 )

Operating Activities

Net cash provided by operating activities was $681.2 million and $646.3 million for the nine month periods ended November 2, 2013 and October 27, 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 nine month period ended November 2, 2013, compared to the same period in the prior year was primarily due to higher net earnings, partially offset by a decrease in accounts payable leverage (defined as accounts payable divided by merchandise inventory) and the timing of payments of certain expenses. The change in total merchandise inventory, net of the change in accounts payable, resulted in a use of cash of approximately $82 million for the nine months ended November 2, 2013, compared to a use of cash of approximately $56 million for the nine months ended October 27, 2012. Accounts payable leverage was 64%, 67%, and 66% as of November 2, 2013, February 2, 2013, and October 27, 2012, respectively. Changes in accounts payable leverage are primarily driven by the timing of packaway receipts and payments.

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 November 2, 2013, packaway inventory was 45% of total inventory compared to 47% at the end of fiscal 2012. At the end of the third quarter for fiscal 2012, packaway inventory was 46% of total inventory compared to 49% at the end of fiscal 2011.

Investing Activities

Net cash used in investing activities was $436.9 million and $257.0 million for the nine month periods ended November 2, 2013 and October 27, 2012, respectively. The increase in cash used for investing activities for the nine month period ended November 2, 2013, compared to the nine month period ended October 27, 2012 was primarily due to an increase in our capital expenditures.

Our capital expenditures were $423.2 million and $255.3 million for the nine month periods ended November 2, 2013 and October 27, 2012, respectively. Our capital expenditures include costs to build or expand distribution centers, develop 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. In July 2013, we purchased the land and building of our previously leased 1.3 million square foot Perris, California distribution center for $70 million.

In October 2013, we entered into a Sale-Purchase Agreement under which we have the right to purchase the office building where our New York buying office is located for $222 million. The building is subject to a 99 year ground lease through June 2111. The Sale-Purchase Agreement contemplates completion of the sale and purchase of the building on or before September 20, 2014, subject to satisfaction of various closing conditions. Under the Sale-Purchase Agreement, we provided a deposit of 10% of the purchase price. In the event we are unable or choose not to complete the purchase of the building, we would forfeit the deposit but have no further liability to the seller or obligation to complete the purchase. We are reviewing financing alternatives for the potential purchase of the building in 2014.


We forecast approximately $585 million in capital expenditures for fiscal year 2013. This forecast includes 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. Our planned capital expenditures for the year have decreased from the amounts we forecast in prior quarters primarily due to a timing shift of certain distribution and store-related capital spend from 2013 to 2014. The growth in capital expenditures in 2013 compared to 2012 is mainly due to our investment in two new distribution centers expected to open in 2014 and 2015, the recently completed 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 purchases of investments of $12.0 million for the nine month period ended November 2, 2013. We had purchases of investments of $0.4 million for the nine month period ended October 27, 2012. We had proceeds from investments of $1.2 million and $0.8 million for the nine month periods ended November 2, 2013 and October 27, 2012, respectively.

Financing Activities

Net cash used in financing activities was $518.8 million and $415.3 million for the nine month periods ended November 2, 2013 and October 27, 2012, respectively. For the nine month periods ended November 2, 2013 and October 27, 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 6.4 million and 5.4 million shares of common stock for aggregate purchase prices of approximately $421.3 million and $334.4 million during the nine month periods ended November 2, 2013, and October 27, 2012, respectively. We also acquired 485,795 and 492,224 shares of treasury stock from our employee stock equity compensation programs, for aggregate purchase prices of approximately $29.1 million and $28.7 million during the nine month periods ended November 2, 2013, and October 27, 2012, respectively.

For the nine month periods ended November 2, 2013 and October 27, 2012, we paid dividends of $111.4 million and $94.6 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 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 100 basis points) and is payable quarterly and upon maturity. As of November 2, 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
November 2, 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         16,358          64,696
Operating leases (rent
obligations)                 414,724        797,571        573,390        531,120       2,316,805
Purchase obligations       2,054,182         46,565              -              -       2,100,747
Total contractual
obligations              $ 2,478,574     $  863,471     $  592,725     $  697,478     $ 4,632,248

1We have a $100.3 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 issued two series of unsecured senior notes in the aggregate principal amount of $150 million, held by various institutional investors. 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 November 2, 2013, we were in compliance with these covenants.

Off-Balance Sheet Arrangements

Operating leases. We currently lease our buying offices, our current corporate headquarters, three warehouse facilities, all but three of our store locations, and two truck and trailer parking facilities. Except for certain leasehold improvements and equipment, these leased locations do not represent long-term capital investments.

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 two of the three 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 lease a 10-acre parcel for trailer parking adjacent to our Perris, California distribution center that expires in 2017 and a facility located in Moreno Valley, California primarily for ancillary truck and trailer parking that expires in 2015. Both of these leases contain renewal provisions.

We lease approximately 192,000 square feet of office space for our current corporate headquarters in Pleasanton, California, under several facility leases. The terms for these leases expire between 2014 and 2015 and contain renewal provisions. In 2011, we purchased land and buildings in Dublin, California. We are currently in the process of preparing this property for our new corporate headquarters with an estimated occupancy of late 2013 and early 2014.

We currently 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 November 2, 2013 we had purchase obligations of approximately $2,101 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 $1,647 million represent purchase obligations of less than one year as of November 2, 2013.


Commercial Credit Facilities

The table below presents our significant available commercial credit facilities
at November 2, 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 100 basis points) and is payable quarterly and upon maturity. Our borrowing ability under this credit facility is subject to our maintaining certain financial ratios. As of November 2, 2013 we had no borrowings outstanding or standby letters of credit issued under this facility and were in compliance with the covenants.

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 November 2, 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 November 2, 2013 and October 27, 2012, we had $24.3 million and $33.8 million, respectively, in standby letters of credit outstanding and $47.2 million and $34.9 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.

Additionally, in the quarter ended November 2, 2013, we issued an $11.1 million standby letter of credit in connection with the New York buying office Sale-Purchase Agreement.

Trade letters of credit. We had $37.7 million and $53.6 million in trade letters of credit outstanding at November 2, 2013 and October 27, 2012, respectively.

Dividends. In November 2013, the Company's Board of Directors declared a cash dividend of $0.17 per common share, payable on December 31, 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 . . .

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