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ROST > SEC Filings for ROST > Form 10-K on 1-Apr-2014All Recent SEC Filings

Show all filings for ROSS STORES INC

Form 10-K for ROSS STORES INC


1-Apr-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 1,146 locations in 33 states, the District of Columbia and Guam as of February 1, 2014. 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 130 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 February 1, 2014.

Our primary objective is to pursue and refine our existing off-price strategies to maintain or improve both profitability and 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 and believe our share gains over the past few years were driven mainly by continued focus on value by consumers. Our sales and earnings gains in 2013 continued to benefit from efficient execution of our off-price model throughout all areas of our business. Our merchandise and operational strategies are designed to take advantage of the expanding market share of the off-price industry as well as the ongoing customer demand for name brand fashions for the family and home at compelling everyday discounts.

Looking ahead to 2014, we are planning additional incremental reductions in average store inventory levels while continuing to maintain strict controls on operating expenses as part of our strategy to maximize our profitability.

We refer to our fiscal years ended February 1, 2014, February 2, 2013, and January 28, 2012 as fiscal 2013, fiscal 2012, and fiscal 2011, respectively. Fiscal 2012 was 53 weeks. Fiscal 2013 and 2011 were 52 weeks.

Results of Operations

The following table summarizes the financial results for fiscal 2013, 2012, and 2011:

                                                    2013        2012   ╣    2011
Sales
Sales (millions)                                $ 10,230     $ 9,721     $ 8,608
Sales growth                                         5.2 %      12.9 %       9.4 %
Comparable store sales growth (52-week basis)          3 %         6 %         5 %

Costs and expenses (as a percent of sales)
Cost of goods sold                                  72.0 %      72.1 %      72.5 %
Selling, general and administrative                 14.9 %      14.8 %      15.2 %
Interest (income) expense, net                         -         0.1 %       0.1 %

Earnings before taxes (as a percent of sales)       13.1 %      13.0 %      12.2 %

Net earnings (as a percent of sales)                 8.2 %       8.1 %       7.6 %

╣Fiscal 2012 was a 53-week year; all other fiscal years presented were 52 weeks.


Stores. Total stores open at the end of fiscal 2013, 2012, and 2011 were 1,276, 1,199, and 1,125, respectively. The number of stores at the end of fiscal 2013, 2012, and 2011 increased by 6%, 7%, and 7% from the respective prior years. 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.

Store Count                                             2013      2012       2011
Beginning of the period                                1,199     1,125      1,055
Opened in the period                                      88        82         80
Closed in the period                                    (11)        (8 )      (10 )
End of the period                                      1,276     1,199      1,125

Selling square footage at the end of the period (000) 28,900 27,800 26,100

Sales. Sales for fiscal 2013 increased $0.5 billion, or 5.2%, compared to the prior year due to the opening of 77 net new stores during 2013 and a 3% increase in comparable store sales (defined as stores that have been open for more than 14 complete months). Sales for fiscal 2012 increased $1.1 billion, or 12.9%, compared to the prior year due to the opening of 74 net new stores during 2012, a 6% increase in sales from comparable stores, and approximately $149 million in sales from the 53rd week.
Our sales mix is shown below for fiscal 2013, 2012, and 2011:

                                                      2013     2012     2011
Ladies                                                  29 %     29 %     29 %
Home Accents and Bed and Bath                           24 %     24 %     25 %
Accessories, Lingerie, Fine Jewelry, and Fragrances     13 %     13 %     13 %
Shoes                                                   13 %     13 %     12 %
Men's                                                   13 %     13 %     13 %
Children's                                               8 %      8 %      8 %
Total                                                  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 systems to improve regional and local merchandise offerings. Although our strategies and store expansion program contributed to sales gains in fiscal 2013, 2012, and 2011, 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 in fiscal 2013 increased $349.5 million compared to the prior year mainly due to increased sales from the opening of 77 net new stores during the year and a 3% increase in sales from comparable stores.

Cost of goods sold as a percentage of sales for fiscal 2013 decreased approximately 15 basis points from the prior year. This improvement was due primarily to a 45 basis point increase in merchandise gross margin, which was partially offset by increases in occupancy of about 20 basis points and increases in distribution and buying expenses of about 5 basis points each. Cost of goods sold in fiscal 2012 increased $770.7 million compared to the prior year mainly due to increased sales from the opening of 74 net new stores during the year and a 6% increase in sales from comparable stores. Cost of goods sold as a percentage of sales for fiscal 2012 decreased approximately 40 basis points from the prior year. This improvement was due primarily to a 40 basis point increase in merchandise gross margin. In addition, occupancy leveraged 25 basis points and distribution expenses as a percent of sales also declined approximately 15


basis points. These favorable items were partially offset by increases in buying and freight costs of 25 and 10 basis points, respectively, and 5 basis points related to the year over year true-up in our shortage reserve.
We cannot be sure that the gross profit margins realized in fiscal 2013, 2012, and 2011 will continue in future years.
Selling, general and administrative expenses. For fiscal 2013, selling, general and administrative expenses ("SG&A") increased $88.5 million compared to the prior year, mainly due to increased store operating costs reflecting the opening of 77 net new stores during the year. SG&A as a percentage of sales for fiscal 2013 increased by approximately 15 basis points compared to the prior year primarily due to higher costs related to the relocation of our data center. For fiscal 2012, SG&A increased $133.8 million compared to the prior year, mainly due to increased store operating costs reflecting the opening of 74 net new stores during the year. SG&A as a percentage of sales for fiscal 2012 decreased by approximately 35 basis points compared to the prior year primarily due to leverage on store operating expenses.
The largest component of SG&A is payroll. The total number of employees, including both full and part-time, as of fiscal year end 2013, 2012, and 2011 was approximately 66,300, 57,500, and 53,900, respectively.
Interest (income) expense, net. In fiscal 2013, interest expense decreased by $7.2 million primarily due to higher capitalization of interest related to construction of our new distribution centers. Interest income decreased by $0.1 million primarily due to lower investment yields as compared to the prior year. As a percentage of sales, net interest expense in fiscal 2013 decreased by approximately five basis points compared to the same period in the prior year. The table below shows interest expense and income for fiscal 2013, 2012, and 2011:

($ millions)                             2013      2012       2011
Interest expense                       $  0.3     $ 7.5     $ 11.0
Interest income                          (0.5 )    (0.6 )     (0.7 )
Total interest (income) expense, net   $ (0.2 )   $ 6.9     $ 10.3

Taxes on earnings. Our effective tax rate for fiscal 2013, 2012 and 2011 was approximately 38% in each year, 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 laws, 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 2014 will be about 38%.

Net earnings. Net earnings as a percentage of sales for fiscal 2013 were higher than fiscal 2012 primarily due to lower cost of goods sold partially offset by higher SG&A. Net earnings as a percentage of sales for fiscal 2012 were higher compared to fiscal 2011 primarily due to both lower cost of goods sold and lower SG&A expenses.

Earnings per share. Diluted earnings per share in fiscal 2013 was $3.88 compared to $3.53 in the prior year period. The 10% increase in diluted earnings per share is attributable to an approximate 6% increase in net earnings and a 4% reduction in weighted average diluted shares outstanding, largely due to the repurchase of common stock under our stock repurchase program. Diluted earnings per share in fiscal 2012 was $3.53 compared to $2.86 in fiscal 2011. The 23% increase in diluted earnings per share is attributable to a 20% 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.

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.


($ millions)                                   2013        2012         2011
Cash provided by operating activities     $ 1,022.0     $ 979.6     $  820.1
Cash used in investing activities            (563.8 )    (425.7 )     (471.8 )
Cash used in financing activities            (681.8 )    (557.0 )     (532.4 )
Net decrease in cash and cash equivalents $  (223.6 )   $  (3.1 )   $ (184.1 )

Operating Activities

Net cash provided by operating activities was $1,022.0 million, $979.6 million, and $820.1 million in fiscal 2013, 2012, and 2011 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.

Net cash from operations increased in 2013 compared to 2012 and in 2012 compared to 2011 primarily due to higher net earnings.

The change in total merchandise inventory, net of the change in accounts payable, resulted in a use of cash of approximately $52 million, $39 million, and $55 million for fiscal 2013, 2012, and 2011, respectively. Accounts payable leverage (defined as accounts payable divided by merchandise inventory) was 62%, 67%, and 67% as of February 1, 2014, February 2, 2013, and January 28, 2012, respectively. Changes in accounts payable leverage are primarily driven by timing of packaway receipts and payments. Accounts payable leverage at the end of fiscal 2013 was also impacted due to the timing shift of the dividend declaration from January 2014 to February 2014.

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. At the end of fiscal 2013, packaway inventory was 49% of total inventory compared to 47% and 49% at the end of fiscal 2012 and 2011, respectively.

Investing Activities

Net cash used in investing activities was $563.8 million, $425.7 million, and $471.8 million in fiscal 2013, 2012, and 2011, respectively. The increase in cash used for investing activities in fiscal 2013 compared to fiscal 2012 was primarily due to an increase in our capital expenditures. The decrease in cash used for investing activities for fiscal 2012 compared to fiscal 2011 was primarily due to a transfer of funds in fiscal 2011 into restricted accounts to serve as collateral for our insurance obligations.

In fiscal 2013, 2012, and 2011, our capital expenditures were $550.5 million, $424.4 million, and $416.3 million, 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. We opened 88, 82, and 80 new stores in fiscal 2013, 2012, and 2011, respectively. In 2013 we purchased the land and building of our previously leased 1.3 million square foot Perris, California distribution center for $70 million; we also spent approximately $60 million building out our new corporate headquarters. Our buying offices, our former corporate headquarters, two truck and trailer parking facilities, 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.


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

($ millions)                                   2013       2012       2011
Distribution                                $ 248.4    $ 157.9    $  86.1
New stores                                    121.3      118.7      114.2
Existing stores                                59.1       86.9      126.8
Information systems, corporate, and other     121.7       60.9       89.2
Total capital expenditures                  $ 550.5    $ 424.4    $ 416.3

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. In September 2013, we deposited $11.1 million and provided an $11.1 million standby letter of credit to meet the 10% deposit obligation. In January 2014, we deposited an additional $2.2 million in escrow for the building bringing our total deposit to $13.3 million. We plan to finance the purchase of the building in 2014.

We are forecasting approximately $800 million in capital expenditures for fiscal year 2014, up from $550.5 million in fiscal 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, this higher capital spending is primarily driven by the expected purchase of our New York buying office and continued construction of our two new distribution centers. We expect to primarily fund capital expenditures with available cash and cash flows from operations and with proceeds from our planned financing of the purchase of our New York buying office.

We purchased $12.0 million and $5.4 million of investments in fiscal 2013 and fiscal 2012, respectively. We purchased no investments in fiscal 2011. We had proceeds from investments of $1.6 million, $6.2 million, and $4.6 million in fiscal 2013, 2012, and 2011, respectively.

Financing Activities

Net cash used in financing activities was $681.8 million, $557.0 million, and $532.4 million in fiscal 2013, 2012, and 2011, respectively. During fiscal 2013, 2012, and 2011, 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 8.2 million, 7.5 million, and 11.3 million shares of common stock for aggregate purchase prices of approximately $550 million, $450 million, and $450 million in fiscal 2013, 2012, and 2011, respectively. We also acquired 496,000, 505,000, and 442,000 shares of treasury stock from our employee stock equity compensation programs, for aggregate purchase prices of approximately $29.9 million, $29.4 million, and $15.9 million during fiscal 2013, 2012, and 2011, respectively.
In February 2014, our Board of Directors declared a quarterly cash dividend of $0.20 per common share, payable on March 31, 2014. Our Board of Directors declared cash dividends of $0.17 per common share in January, May, August, and November 2013, cash dividends of $0.14 per common share in January, May, August, and November 2012, and cash dividends of $0.11 per common share in January, May, August, and November 2011.
During fiscal 2013, 2012, and 2011, we paid dividends of $147.9 million, $125.7 million, and $102.0 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 2014.

Our existing $600 million unsecured revolving 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


100 basis points) and is payable quarterly and upon maturity. As of February 1, 2014, 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
February 1, 2014:
                           Less than          1 - 3          3 - 5        After 5
($000)                        1 year          years          years          years          Total╣
Senior notes             $         -     $        -     $   85,000     $   65,000     $   150,000
Interest payment
obligations                    9,668         19,335         18,657         12,203          59,863
Operating leases (rent
obligations)                 417,443        801,735        569,380        498,371       2,286,929
Purchase obligations       1,792,423         19,260              -              -       1,811,683
Total contractual
obligations              $ 2,219,534     $  840,330     $  673,037     $  575,574     $ 4,308,475

1We have a $104.9 million liability for unrecognized tax benefits that is included in other long-term liabilities on our 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 February 1, 2014, we were in compliance with these covenants.

Off-Balance Sheet Arrangements

Operating leases. We currently lease our buying offices, our former 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 2016 and 2017. The third warehouse is in Fort Mill, South Carolina, with a lease expiring in 2016. The leases for all three warehouses contain renewal provisions.

We lease a 10-acre parcel for trailer parking adjacent to our Perris, California distribution center that expires in 2017 and a 20-acre 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 former corporate headquarters in Pleasanton, California, under several facility leases. The term for the majority of these leases expires in June 2014. The lease term for the remaining space of approximately 11,000 square feet expires in March 2015. We do not plan to renew any of these leases.

We currently lease approximately 411,000 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. We plan to purchase our New York buying office in 2014.


Purchase obligations. As of February 1, 2014 we had purchase obligations of approximately $1,812 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.

Commercial Credit Facilities

The table below presents our significant available commercial credit facilities
at February 1, 2014:

                                               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 D of Notes to Consolidated Financial Statements.

Revolving credit facility. Our existing $600 million unsecured revolving 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 100 basis points) and is payable quarterly and upon maturity. As of February 1, 2014 we had no borrowings outstanding or standby letters of credit issued under this facility.

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 February 1, 2014 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 February 1, 2014 and February 2, 2013, 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 the collateral trust consists of restricted cash, cash equivalents, and investments.

As of February 1, 2014, we also had an $11.1 million standby letter of credit in connection with our New York buying office Sale-Purchase Agreement.

Trade letters of credit. We had $31.6 million and $38.0 million in trade letters . . .

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