UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE --- SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 29, 2000 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number 0-14678 ROSS STORES, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-1390387 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8333 CENTRAL AVENUE, NEWARK, CALIFORNIA 94560-3433 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (510) 505-4400 Former name, former address and former fiscal year, N/A if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of Common Stock, with $.01 par value, outstanding on August 25, 2000 was 82,153,230. 1
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ROSS STORES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------- JULY 29, January 29, JULY 31, ($000) 2000 2000 1999 - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> ASSET (UNAUDITED) (Note A) (UNAUDITED) CURRENT ASSETS Cash and cash equivalents $ 41,948 $ 79,329 $ 30,119 Accounts receivable 16,217 15,689 14,824 Merchandise inventory 577,569 500,494 522,904 Prepaid expenses and other 19,061 17,682 16,177 ----------------- ----------------- --------------- Total Current Assets 654,795 613,194 584,024 PROPERTY AND EQUIPMENT Land and buildings 54,361 49,919 49,111 Fixtures and equipment 278,377 262,022 228,456 Leasehold improvements 167,080 161,571 147,488 Construction-in-progress 28,404 26,040 38,672 ----------------- ----------------- --------------- 528,222 499,552 463,727 Less accumulated depreciation and amortization 244,730 226,388 208,708 ----------------- ----------------- --------------- 283,492 273,164 255,019 Deferred income taxes and other assets 62,338 61,320 51,772 ----------------- ----------------- --------------- TOTAL ASSETS $ 1,000,625 $ 947,678 $ 890,815 - ---------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 280,855 $ 254,293 $ 245,182 Accrued expenses and other 84,564 102,178 85,522 Accrued payroll and benefits 42,184 48,283 37,466 Income taxes payable 20,071 17,716 21,803 Short-term debt 11,800 - 17,200 ----------------- ----------------- --------------- Total Current Liabilities 439,474 422,470 407,173 Long-term debt 80,000 - - Long-term liabilities 53,704 51,577 47,703 STOCKHOLDERS' EQUITY Common stock 820 888 453 Additional paid-in capital 226,187 234,635 222,666 Retained earnings 200,440 237,908 212,820 ----------------- ----------------- --------------- 427,447 473,431 435,939 ----------------- ----------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,000,625 $ 947,678 $ 890,815 - ---------------------------------------------------------------------------------------------------------------------- </TABLE> See notes to condensed consolidated financial statements. 2
ROSS STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED - ----------------------------------------------------------------------------------------------------------------------- JULY 29, JULY 31, JULY 29, JULY 31, ($000, except per share data, unaudited) 2000 1999 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> SALES $ 657,035 $ 614,576 $ 1,290,463 $ 1,165,401 COSTS AND EXPENSES Cost of goods sold and occupancy 455,797 424,143 890,222 803,521 General, selling and administrative 130,646 117,677 252,092 223,869 Depreciation and amortization 10,772 9,132 21,250 18,452 Interest expense 835 182 840 20 ---------------- --------------- --------------- ----------- 598,050 551,134 1,164,404 1,045,862 Earnings before taxes 58,985 63,442 126,059 119,539 Provision for taxes on earnings 23,063 24,806 49,289 46,740 ---------------- --------------- --------------- ----------- Net earnings $ 35,922 $ 38,636 $ 76,770 $ 72,799 - ------------------------------------------------------------------------------------------------------------------------- Net earnings per share: Basic $ .43 $ .42 $ .91 $ .80 Diluted $ .43 $ .42 $ .90 $ .78 - ------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding: Basic 82,753 91,132 84,020 91,530 Diluted 83,530 92,734 84,853 93,102 - -------------------------------------------------------------------------------------------------------------------------- Stores open at end of period 392 363 392 363 - -------------------------------------------------------------------------------------------------------------------------- </TABLE> See notes to condensed consolidated financial statements. 3
ROSS STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------ SIX MONTHS ENDED ---------------- JULY 29, JULY 31, ($000, unaudited) 2000 1999 - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 76,770 $ 72,799 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 21,250 18,452 Other amortization 5,016 4,984 Change in assets and liabilities: Merchandise inventory (77,075) (56,445) Other current assets - net (1,907) (3,609) Accounts payable 29,890 85 Other current liabilities - net (16,429) (1,066) Other 2,985 2,201 ---------------------------------- Net cash provided by operating activities 40,500 37,401 - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (39,008) (35,421) ---------------------------------- Net cash used in investing activities (39,008) (35,421) - ------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Borrowing under lines of credit 11,800 17,200 Proceeds of long-term debt 80,000 - Issuance of common stock related to stock plans 3,586 8,803 Repurchase of common stock (127,966) (71,988) Dividends paid (6,293) (5,959) ---------------------------------- Net cash used in financing activities (38,873) (51,944) ---------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (37,381) (49,964) Cash and cash equivalents: Beginning of year 79,329 80,083 ---------------------------------- End of quarter $ 41,948 $ 30,119 - ------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL CASH FLOW DISCLOSURES Interest paid $ 784 $ 105 Income taxes paid $ 49,146 $ 43,741 - ------------------------------------------------------------------------------------------------------------ </TABLE> See notes to condensed consolidated financial statements. 4
ROSS STORES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three and Six Months Ended July 29, 2000 and July 31, 1999 (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared from the records of the company without audit and, in the opinion of management, include all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at July 29, 2000 and July 31, 1999; the results of operations for the three and six months ended July 29, 2000 and July 31, 1999; and changes in cash flows for the six months ended July 29, 2000 and July 31, 1999. The balance sheet at January 29, 2000, presented herein, has been derived from the audited financial statements of the company for the fiscal year then ended. Accounting policies followed by the company are described in Note A to the audited consolidated financial statements for the fiscal year ended January 29, 2000. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted for purposes of the interim condensed consolidated financial statements. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including notes thereto, for the year ended January 29, 2000. The results of operations for the three-month and six-month periods herein presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements at July 29, 2000 and July 31, 1999, and for the three-months and six-months then ended have been reviewed, prior to filing, by the registrant's independent accountants whose report covering their review of the financial statements is included in this report on page 6. 5
INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Stockholders of Ross Stores, Inc. Newark, California We have reviewed the accompanying condensed consolidated balance sheets of Ross Stores, Inc. (the "Company") as of July 29, 2000 and July 31, 1999, and the related condensed consolidated statements of earnings and cash flows for the three-month and six month periods then ended. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Ross Stores, Inc. as of January 29, 2000, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated March 10, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 29, 2000 is fairly stated, in all material respects, in relation to the. /s/Deloitte & Touche LLP San Francisco, CA August 18, 2000 6
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. The Company's 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 the subsection entitled "Forward-Looking Statements and Factors Affecting Future Performance" below. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and the consolidated financial statements in the Company's 1999 Form 10-K. All information is based on the Company's fiscal calendar. RESULTS OF OPERATIONS - --------------------- PERCENTAGES OF SALES <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED - --------------------------------------------------------------------------------------------------------------------------- JULY 29, JULY 31, JULY 29, JULY 31, 2000 1999 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> SALES Sales ($000) $657,035 $614,576 $1,290,463 $1,165,401 Sales growth 6.9% 14.5% 10.7% 14.1% Comparable store sales growth 0% 7% 3% 7% Cost of goods sold and occupancy 69.4% 69.0% 69.0% 68.9% General, selling and administrative 19.9% 19.1% 19.5% 19.2% Depreciation and amortization 1.6% 1.5% 1.7% 1.6% Interest expense 0.1% 0.0% 0.1% 0.0% EARNINGS BEFORE TAXES 9.0% 10.3% 9.8% 10.3% PROVISION FOR TAXES ON EARNINGS 3.5% 4.0% 3.8% 4.0% NET EARNINGS 5.5% 6.3% 6.0% 6.3% - ---------------------------------------------------------------------------------------------------------------------------- </TABLE> SALES The increase in sales for the three and six months ended July 29, 2000, compared to the same periods in the prior year, reflects an increase in the number of stores open during the current periods. The increase in sales for the six months ended July 29, 2000 also reflects an increase in comparable store sales. COSTS AND EXPENSES Cost of goods sold and occupancy expenses as a percentage of sales for the three and six months ended July 29, 2000, increased compared to the same periods in the prior year, primarily due to reduced leverage on occupancy costs resulting from lower comparable store sales than in the prior periods. The increase in general, selling and administrative expenses as a percentage of sales for the three and six months ended July 29, 2000, compared to the same periods in the prior year, primarily reflects higher store, benefit and distribution costs as a percentage of sales, partially offset by leverage on advertising, lower incentive plan costs and elimination of Year 2000 ("Y2K") related expense in fiscal 2000. 7
Depreciation and amortization as a percentage of sales for the three and six months ended July 29, 2000, compared to the same periods in the prior year, increased primarily due to reduced leverage on lower comparable store sales than in the prior periods. The increase in interest expense as a percentage of sales for the three and six months ended July 29, 2000, compared to the same periods in the prior year, is due to higher average borrowings primarily to fund the increase in the company's stock repurchase program. NET EARNINGS The decrease in net earnings as a percentage of sales in the three and six months ended July 29, 2000, compared to the same periods in the prior year, is primarily due to a slowdown in the rate of comparable store sales growth during the second quarter and the increase in the cost of goods sold and occupancy expenses ratio, and the general, selling, and administrative expenses ratio. INCOME TAXES PAID The company paid $49.1 million in income taxes in the six months ended July 29, 2000, versus $43.7 million in the six months ended July 31, 1999. The increase in income taxes paid primarily resulted from the timing of estimated tax payments. The Company's effective tax rate in both periods was approximately 39%. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES - ---------------------------------------------------- The primary uses of cash during the six months ended July 29, 2000 were for (i) the repurchase of the company's common stock; (ii) the purchase of inventory; and (iii) capital expenditures for new stores, improvements to existing stores, improvements in management information systems, and various expenditures to improve the central office and distribution centers. Total consolidated inventories increased 10% at July 29, 2000 from July 31, 1999, due mainly to an 8% increase in the number of stores open at the end of each period and a planned increase in the level of packaway merchandise. The increase in accounts payable at July 29, 2000 from July 31, 1999 resulted mainly from the higher level of inventory purchases over the prior year. In January 2000, the company announced a $300 million common stock repurchase program to be completed over the next two years. In the six months ended July 29, 2000, the company repurchased approximately 7.5 million shares for an aggregate purchase price of approximately $128 million. The company has available under its principal bank credit agreement a $160.0 million revolving credit facility and a $30.0 million credit facility for the issuance of letters of credit, both of which expire in September 2002. Additionally, the company has uncommitted short-term bank lines of credit totaling $45.0 million. At July 29, 2000, the company had $91.8 million outstanding under these credit agreements, of which $80.0 million is classified as long-term debt under the company's revolving credit facility. 8
The company estimates that cash flow from operations, bank credit lines and trade credit are adequate to meet operating cash needs as well as to provide for the two-year stock repurchase program of up to $300.0 million in 2000 and 2001, dividend payments and planned capital additions during the upcoming year. FORWARD-LOOKING STATEMENTS AND FACTORS AFFECTING FUTURE - ------------------------------------------------------- PERFORMANCE - ----------- In this report and from time to time the company may make forward-looking statements, which reflect the company's current beliefs and estimates with respect to future events and the company's future financial performance, operations and competitive strengths. The words "expect," "anticipate," "estimate," "believe," "looking ahead," "forecast," "plan" and similar expressions identify forward-looking statements. The company's continued success depends, in part, upon its ability to increase sales at existing locations, to open new stores and to operate stores on a profitable basis. There can be no assurance that the company's existing strategies and store expansion program will result in a continuation of revenue and profit growth. Future economic and industry trends that could potentially impact revenue and profitability remain difficult to predict. As a result, these forward-looking statements are subject to certain risks and uncertainties that could cause the company's actual results to differ materially from historical results or current expectations. These factors include, without limitation, ongoing competitive pressures in the apparel industry, obtaining acceptable store locations, the company's ability to continue to purchase attractive name-brand merchandise at desirable discounts, successful implementation of the company's merchandise diversification strategy, the company's ability to successfully extend its geographic reach, unseasonable weather trends, changes in the level of consumer spending on or preferences in apparel or home-related merchandise, the company's ability to complete the two-year $300.0 million repurchase program in 2000 and 2001 at purchase prices that result in accretion to earnings per share in line with planned expectations, and greater than planned costs. In addition, the company's corporate headquarters, one of its distribution centers and 40% of its stores are located in California. Therefore, a downturn in the California economy or a major natural disaster there could significantly affect the company's operating results and financial condition. In addition to the above factors, the apparel industry is highly seasonal. The combined sales of the company for the third and fourth (holiday) fiscal quarters are historically higher than the combined sales for the first two fiscal quarters. The company has realized a significant portion of its profits in each fiscal year during the fourth quarter. If intensified price competition, lower than anticipated consumer demand or other factors, were to occur during the third and fourth quarters, and in particular during the fourth quarter, the company's fiscal year results could be adversely affected. The company does not undertake to publicly update or revise these forward-looking statements even if experience or future changes indicate that any projected results expressed or implied therein will not be realized. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Management believes that the market risk associated with the company's ownership of market-risk sensitive financial instruments (including interest rate risk and equity price risk) as of July 29, 2000 is not material. 9
PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders held on June 7, 2000 (the "2000 Annual Meeting"), the stockholders of the company voted on and approved the following proposals: Proposal 1 to elect two class II directors (Michael Balmuth and Lawrence M. Higby) for a three-year term. Proposal 2 to amend the Employee Stock Purchase Plan to increase the share reserve by 1,000,000 shares. Proposal 3 to ratify the appointment of Deloitte & Touche LLP as the company's independent certified public accountants for the fiscal year ended February 3, 2001. 2000 ANNUAL MEETING ELECTION RESULTS - - -------------------------------------- PROPOSAL 1: ELECTION OF DIRECTORS <TABLE> <CAPTION> DIRECTOR IN FAVOR WITHHELD <S> <C> <C> Michael Balmuth 77,965,233 344,820 Lawrence M. Higby 77,963,755 346,298 </TABLE> PROPOSAL 2: AMENDMENTS TO THE EMPLOYEE STOCK PURCHASE PLAN <TABLE> <CAPTION> IN FAVOR AGAINST ABSTAIN <S> <C> <C> 76,599,999 1,314,387 395,667 </TABLE> PROPOSAL 3: RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDED FEBRUARY 3, 2001. <TABLE> <CAPTION> IN FAVOR AGAINST ABSTAIN <S> <C> <C> 78,237,741 37,163 35,149 </TABLE> 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Incorporated herein by reference to the list of Exhibits contained in the Exhibit Index that begins on page 14 of this Report. (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. ROSS STORES, INC. Registrant Date: September 11, 2000 /s/ John G. Call John G. Call, Senior Vice President, Chief Financial Officer, Corporate Secretary and Principal Accounting Officer 11
INDEX TO EXHIBITS <TABLE> <CAPTION> Exhibit Number Exhibit ------- ------- <S> <C> 3.1 Corrected First Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Form 10-K filed by Ross Stores for its year ended January 30, 1999. 3.2 Amended By-laws, dated August 25, 1994, incorporated by reference to Exhibit 3.2 to the Form 10-Q filed by Ross Stores for its quarter ended July 30, 1994. 10.3 Fourth Amended and Restated Employee Stock Purchase Plan. 15 Letter re: Unaudited Interim Financial Information. 27 Financial Data Schedules (submitted for SEC use only). </TABLE> 12