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 May 2, 1998 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 (State or other jurisdiction of 94-1390387 incorporation or organization) (I.R.S. Employer Identification No.) 8333 Central Avenue, Newark, California 94560-3433 (Address of principal executive offices) (Zip Code) Registrant's telephone number, (510) 505-4400 including area code Former name, former address and former N/A fiscal year,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 May 29, 1998 was 47,579,988.
2 <TABLE> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. <CAPTION> ROSS STORES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ($000) May 2, January 31, May 3, ASSETS 1998 1998 1997 (Unaudited) (Note A) (Unaudited) <S> <C> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 29,725 $ 56,369 $ 26,879 Accounts receivable 10,513 8,122 9,583 Merchandise inventory 460,578 418,825 409,014 Prepaid expenses and other 15,304 15,108 13,405 __________ __________ __________ Total Current Assets 516,120 498,424 458,881 PROPERTY AND EQUIPMENT Land and buildings 24,183 24,115 24,115 Fixtures and equipment 196,609 190,186 176,756 Leasehold improvements 145,849 144,247 137,714 Construction-in-progress 24,563 25,763 12,654 __________ __________ __________ 391,204 384,311 351,239 Less accumulated depreciation and amortization 186,951 179,590 157,806 __________ __________ __________ 204,253 204,721 193,433 Other assets 40,934 34,808 30,842 __________ __________ __________ $ 761,307 $ 737,953 $ 683,156 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 216,013 $ 201,998 $ 197,926 Accrued expenses and other 93,164 82,290 80,451 Accrued payroll and benefits 27,773 39,458 26,772 __________ __________ __________ Total Current Liabilities 336,950 323,746 305,149 Long-term liabilities 40,085 33,526 29,356 STOCKHOLDERS' EQUITY Capital stock 478 479 496 Additional paid-in capital 199,008 195,562 167,361 Retained earnings 184,786 184,640 180,794 __________ __________ __________ 384,272 380,681 348,651 __________ __________ __________ $ 761,307 $ 737,953 $ 683,156 </TABLE> See notes to condensed consolidated financial statements.
3 ROSS STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS Three Months Ended May 2, May 3, ($000 except per share data, unaudited) 1998 1997 SALES $ 484,276 $ 442,841 COSTS AND EXPENSES Cost of goods sold and occupancy 336,816 309,513 General, selling and administrative 94,057 86,664 Depreciation and amortization 7,882 7,275 Interest income (135) (200) ___________ __________ $ 438,620 $ 403,252 Earnings before taxes 45,656 39,589 Provision for taxes on earnings 17,806 15,836 __________ __________ Net earnings $ 27,850 $ 23,753 ==================================================================== Net earnings per share: Basic $ .58 $ .48 Diluted $ .57 $ .47 ===================================================================== Weighted average shares outstanding: Basic 47,849 49,399 Diluted 48,814 50,486 ==================================================================== Stores open at end of period 331 315 ===================================================================== See notes to condensed consolidated financial statements.
4 <TABLE> ROSS STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended May 2, May 3, ($000, unaudited) 1998 1997 <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 27,850 $ 23,753 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 7,882 7,275 Other amortization 2,412 1,832 Change in assets and liabilities: Merchandise inventory (41,753) (35,324) Other current assets - net (2,587) (1,868) Accounts payable 16,651 16,045 Other current liabilities - net (3,698) (13,627) Other 1,582 (4) __________ __________ Net cash provided by (used in) operating activities 8,339 (1,918) CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (11,519) (10,688) __________ __________ Net cash used in investing activities (11,519) (10,688) CASH FLOWS FROM FINANCING ACTIVITIES Borrowing under line of credit agreement 5,700 2,500 Repayment of long-term debt (63) (47) Issuance of common stock related to stock plans 3,937 2,754 Repurchase of common stock (30,418) (8,286) Dividends paid (2,620) (2,213) __________ __________ Net cash used in financing activities (23,464) (5,292) __________ __________ NET DECREASE IN CASH (26,644) (17,898) Cash and cash equivalents: Beginning of year 56,369 44,777 __________ ________ End of quarter $ 29,725 $ 26,879 SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $ 55 $ 40 Income taxes paid $ 3,934 $ 18,491 </TABLE> See notes to condensed consolidated financial statements.
5 ROSS STORES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended May 2, 1998 and May 3, 1997 (Unaudited) NOTE A - 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 May 2, 1998 and May 3, 1997; the interim results of operations for the three months ended May 2, 1998 and May 3, 1997; and changes in cash flows for the three months then ended. The balance sheet at January 31, 1998, 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 31, 1998. 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 condensed consolidated interim financial statements. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including notes thereto, for the year ended January 31, 1998. The results of operations for the three month periods herein presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements at May 2, 1998 and May 3, 1997, and for the three 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.
6 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. and its subsidiaries (the "Company") as of May 2, 1998 and May 3, 1997, and the related condensed consolidated statements of earnings for the three-month period then ended and condensed consolidated statements of cash flows for the three-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 generally accepted auditing standards, 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 generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Ross Stores, Inc. as of January 31, 1998, 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 17, 1998, 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 31, 1998 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. Deloitte & Touche LLP San Francisco, CA May 22, 1998
7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS Percentage Of Sales Three Months Ended May 2, May 3, 1998 1997 SALES Sales ($000) $484,276 $442,841 Sales growth (quarter to quarter) 9.4% 19.4% Comparable store sales growth 4% 11% Stores open at end of period 331 315 COSTS AND EXPENSES (as a percentage of sales) Cost of goods sold and occupancy 69.6% 69.9% General, selling and administrative 19.4% 19.6% Depreciation and amortization 1.6% 1.6% Interest income (0%) (0%) NET EARNINGS 5.8% 5.4% Sales The results of operations for the three months ended May 2, 1998, over the same period last year, reflect an increase in comparable store sales and a greater number of open stores during the current period. Costs and Expenses The decline from the comparable period in the prior year in the cost of goods sold and occupancy percentage for the three months ended May 2, 1998 was due mainly to the combination of leverage on occupancy costs and slightly higher initial markups as a percentage of sales. General, selling and administrative expenses as a percentage of sales declined modestly from the comparable quarter in the prior year. This improvement was due to the company's continued focus on strict expense controls and the leverage realized from the comparable store sales gain of 4%. Net earnings for the three months ended May 2, 1998, totaled $27.9 million, or $.57 per diluted share. These results include $732,000 pre-tax, or $.01 per diluted share, in expenses related to the company's year 2000 compliance program. Excluding these costs, net earnings for the first quarter of 1998 totaled $28.3 million, compared to $23.8 million in the prior year, while earnings per diluted share grew 23% to $.58, compared to $.47 per diluted share for the three months ended May 3, 1997.
8 Information Systems and the Year 2000 During the fourth quarter of fiscal 1997, the company retained an outside consultant to help the company develop and implement a year 2000 compliance program consisting of assessment, remediation and testing. The company expects that its systems and software will be year 2000 compliant by mid-1999. Aggregate costs for work related to year 2000 efforts in fiscal 1998 and 1999 currently are anticipated to total approximately $12.0 million, which includes about $6.0 million for capital investments in systems. Approximately $4.0 million of this capital outlay will be incurred in fiscal 1998, with another $2.0 million in capital expenditures planned for fiscal 1999. The $6.0 million in anticipated expense related to year 2000 compliance will be incurred over the next several quarters and includes $732,000, pre-tax, reported in fiscal 1998 first quarter results, with an estimated $3.3 million expected in the balance of fiscal 1998 and approximately $2.0 million expected in fiscal 1999. Taxes on Earnings The company paid $3.9 million in income taxes in the quarter ended May 2, 1998 versus $18.5 million paid in the quarter ended May 3, 1997. This $14.6 million decline in income taxes paid during the first fiscal quarter of 1998 compared to the same period in the prior year resulted from timing of tax deductions taken by the company primarily related to the company's stock option plans. The company's effective tax rate for the first quarter of 1998 was 39% and the first quarter of 1997 was 40%. The rate for both periods reflects the applicable statutory tax rates. LIQUIDITY AND CAPITAL RESOURCES The primary uses of cash, other than for operating expenses, during the first three months of fiscal 1998 were for (i) purchase of inventory; (ii) repurchase of the company's common stock; and (iii) capital expenditures for new stores and improvements to existing locations. On a comparable store basis, average in-store inventories for the quarter ended May 2, 1998 were down slightly from the same period in the prior year. Total consolidated inventories increased 13% at the end of the first quarter in fiscal 1998 over the same quarter last year as a result of new store expansion and the planned increase in packaway inventories. In January 1998, the company announced a $110 million common stock repurchase program. For the first quarter ended May 2, 1998, the company spent $30.4 million to repurchase approximately 740,000 shares of common stock compared to the $8.3 million spent for 355,000 shares of common stock for the quarter ended May 3, 1997. The company exercised its right to purchase its Newark, California distribution center and corporate headquarters for $24.6 million. The company closed this transaction on June 3, 1998 with funding provided by internally generated cash and bank borrowings under the existing credit agreement. The company believes it can fund its capital needs for the remainder of the fiscal year and the current stock repurchase program through internally generated cash, trade credit, established bank lines and lease financing.
9 FORWARD LOOKING STATEMENTS AND FACTORS AFFECTING FUTURE PERFORMANCE This report includes a number of 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" 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, the forward looking statements that are contained herein 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, unseasonable weather trends, especially in California, changes in the level of consumer spending on or preferences in apparel or home related merchandise and larger than planned costs that could be related to necessary modifications to the company's computer hardware and software systems to enable them to process information with dates or date ranges spanning the year 2000 and beyond. The company presently believes that, with modifications to existing software and conversions to new software, the year 2000 issue will not pose significant operational problems for the company's computer systems as so modified and converted. However, if unforeseen difficulties arise or such modifications and conversions are not completed timely, or if the company's vendors' or suppliers' systems are not modified to become year 2000 compliant, then the year 2000 issue may have a material impact on the operations of the company. In addition, the company's corporate headquarters, one distribution center and 45% of its stores are located in California. Therefore, a downturn in the California economy or a major natural disaster could significantly impact 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 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. Intensified price competition, lower than anticipated consumer demand or other seasonal factors, if they were to occur during the last six months, and in particular during the fourth quarter, could adversely affect the company's fiscal year results. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable.
10 PART II. OTHER INFORMATION 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 which begins on page 11 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: June 12, 1998 /s/John G. Call John G. Call, Senior Vice President, Chief Financial Officer and Principal Accounting Officer
11 INDEX TO EXHIBITS Exhibit Number Exhibit 3.1 First Restated Certificate of Incorporation, dated May 28, 1998, filed with the Delaware Secretary of State on June 4, 1998 by Ross Stores, Inc., a Delaware corporation ("Ross Stores"). 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. 10.1 Agreement of Lease, dated November 24, 1986, for Ross Stores' corporate headquarters and distribution center in Newark, CA, incorporated by reference to Exhibit 10.5 to the Form 8-B. 10.2 Credit Agreement, dated September 15, 1997, among Ross Stores, Bank of America, National Trust and Savings Association ("Bank of America") as Agent and the other financial institutions party thereto, incorporated by reference to Exhibit 10.2 to the Form 10-Q filed by Ross Stores for its quarter ended November 1, 1997. 10.3 Letter of Credit Agreement, dated September 15, 1997, between Ross Stores and Bank of America, incorporated by reference to Exhibit 10.3 to the Form 10-Q filed by Ross Stores for its quarter ended November 1, 1997. 10.4 Amendment to Credit Agreement, dated as of October 7, 1997 between Ross Stores and Bank of America, incorporated by reference to Exhibit 10.4 to the Form 10- Q filed by Ross Stores for its quarter ended November 1, 1997. 10.5 Second Amendment to Credit Agreement, dated as of January 30, 1998 between Ross Stores and Bank of America, incorporated by reference to Exhibit 10.5 to the Form 10-K filed by Ross Stores for its year ended January 31, 1998 ("1997 Form 10-K"). MANAGEMENT CONTRACTS AND COMPENSATORY PLANS (EXHIBITS 10.6 - 10.37) 10.6 Amended and Restated 1992 Stock Option Plan, incorporated by reference to the appendix to the Proxy Statement filed by Ross Stores on April 24, 1998 for its Annual Stockholders Meeting held May 28, 1998. 10.7 Third Amended and Restated Ross Stores Employee Stock Purchase Plan, incorporated by reference to the appendix to the Proxy Statement filed by Ross Stores on April 24, 1995 for its Annual Stockholders Meeting held May 25, 1995. 10.8 Third Amended and Restated Ross Stores 1988 Restricted Stock Plan, incorporated by reference to the appendix to the Proxy Statement filed by Ross Stores on April 24, 1996 for its Annual Stockholders Meeting held May 30, 1996 ("1996 Proxy Statement").
12 Exhibit Number Exhibit 10.9 1991 Outside Directors Stock Option Plan, incorporated by reference to the appendix to the 1996 Proxy Statement. 10.10 Ross Stores Executive Medical Plan, incorporated by reference to Exhibit 10.13 to the 1993 Form 10-K filed by Ross Stores for its year ended January 29, 1994 ("1993 Form 10-K"). 10.11 Third Amended and Restated Ross Stores Executive Supplemental Retirement Plan, incorporated by reference to Exhibit 10.14 to the 1993 Form 10-K. 10.12 Ross Stores Non-Qualified Deferred Compensation Plan, incorporated by reference to Exhibit 10.15 to the 1993 Form 10-K. 10.13 Ross Stores Incentive Compensation Plan, incorporated by reference to the appendix to the 1996 Proxy Statement. 10.14 Amended and Restated Employment Agreement between Ross Stores and Norman A. Ferber, effective as of June 1, 1995, incorporated by reference to Exhibit 10.17 to the Form 10-Q filed by Ross Stores for its quarter ended October 28, 1995. 10.15 Amendment to Amended and Restated Employment Agreement between Ross Stores and Norman A. Ferber, entered into July 29, 1996, incorporated by reference to Exhibit 10.17 to the Form 10-Q filed by Ross Stores for its quarter ended August 3, 1996. 10.16 Amendment to Amended Restated Employment Agreement between Ross Stores and Norman A. Ferber, effective as of March 20, 1997 incorporated by reference to Exhibit 10.19 to the Form 10-Q filed by Ross Stores for its quarter ended May 3, 1997. 10.17 Third Amendment to Amended and Restated Employment Agreement between Ross Stores and Norman A. Ferber, effective as of April 15, 1997, incorporated by reference to Exhibit 10.20 to the Form 10-Q filed by Ross Stores for its quarter ended May 3, 1997. 10.18 Fourth Amendment to Amended and Restated Employment Agreement between Ross Stores and Norman A. Ferber, effective as of November 20, 1997, incorporated by reference to Exhibit 10.18 to the 1997 Form 10-K. 10.19 Employment Agreement between Ross Stores and Melvin A. Wilmore, effective as of March 15, 1994, incorporated by reference to Exhibit 10.20 to the Form 10-Q filed by Ross Stores for its quarter ended April 30, 1994.
13 Exhibit Number Exhibit 10.20 Amendment to Employment and Stock Grant Agreements by and between Ross Stores and Melvin A. Wilmore, effective as of March 16, 1995, incorporated by reference to Exhibit 10.20 to the Form 10-Q filed by Ross Stores for its quarter ended October 28, 1995. 10.21 Second Amendment to Employment Agreement by and between Ross Stores and Melvin A. Wilmore, effective as of June 1, 1995, incorporated by reference to Exhibit 10.21 to the Form 10-Q filed by Ross Stores for its quarter ended October 28, 1995. 10.22 Third Amendment to Employment Agreement by and between Ross Stores and Melvin A. Wilmore, entered into July 29, 1996, incorporated by reference to Exhibit 10.22 to the Form 10-Q filed by Ross Stores for its quarter ended August 3, 1996. 10.23 Fourth Amendment to Employment Agreement by and between Ross Stores and Melvin A. Wilmore, entered into May 19, 1997, incorporated by reference to Exhibit 10.25 to the Form 10-Q filed by Ross Stores for its quarter ended August 2, 1997. 10.24 Employment Agreement between Ross Stores and Michael Balmuth, effective as of February 1, 1995, incorporated by reference to Exhibit 10.15 to the Form 10-Q filed by Ross Stores for its quarter ended April 29, 1995. 10.25 Amendment to Employment Agreement between Ross Stores and Michael Balmuth, effective as of June 1, 1995, incorporated by reference to Exhibit 10.24 to the Form 10- Q filed by Ross Stores for its quarter ended October 28, 1995. 10.26 Second Amendment to Employment Agreement between Ross Stores and Michael Balmuth, entered into July 29, 1996, incorporated by reference to Exhibit 10.26 to the Form 10- Q filed by Ross Stores for its quarter ended August 3, 1996. 10.27 Third Amendment to Employment Agreement between Ross Stores and Michael Balmuth, entered into May 19, 1997, incorporated by reference to Exhibit 10.29 to the Form 10- Q filed by Ross Stores for its quarter ended August 2, 1997. 10.28 Employment Agreement between Ross Stores and Barry S. Gluck, effective as of March 1, 1996, incorporated by reference to Exhibit 10.23 to the Form 10-Q filed by Ross Stores for its quarter ended May 4, 1996. 10.29 First Amendment to Employment Agreement between Ross Stores and Barry S. Gluck, dated September 1, 1996, incorporated by reference to Exhibit 10.28 to the Form 10- Q filed by Ross Stores for its quarter ended October 2, 1996. 10.30 Second Amendment to Employment Agreement between Ross Stores and Barry S. Gluck, effective as of March 1, 1998. 10.31 Employment Agreement between Ross Stores and Irene A. Jamieson, effective as of March 1, 1996, incorporated by reference to Exhibit 10.24 to the Form 10-Q filed by Ross Stores for its quarter ended May 4, 1996.
14 Exhibit Number Exhibit 10.32 First Amendment to Employment Agreement between Ross Stores and Irene A. Jamieson, dated September 1, 1996, incorporated by reference to Exhibit 10.30 to the Form 10- Q filed by Ross Stores for its quarter ended October 2, 1996. 10.33 Second Amendment to Employment Agreement between Ross Stores and Irene A. Jamieson, effective as of March 1, 1998. 10.34 Employment Agreement between Ross Stores and Barbara Levy, effective as of March 1, 1996, incorporated by reference to Exhibit 10.25 to the Form 10-Q filed by Ross Stores for its quarter ended May 4, 1996. 10.35 First Amendment to Employment Agreement between Ross Stores and Barbara Levy, dated September 1, 1996, incorporated by reference to Exhibit 10.32 to the Form 10- Q filed by Ross Stores for its quarter ended October 2, 1996. 10.36 Second Amendment to Employment Agreement between Ross Stores and Barbara Levy, effective as of March 1, 1998. 10.37 Consulting Agreement between Ross Stores and Stuart G. Moldaw, effective as of April 1, 1997 incorporated by reference to Exhibit 10.34 to the Form 10-Q filed by Ross Stores for its quarter ended May 3, 1997. 15 Letter re: Unaudited Interim Financial Information. 27 Financial Data Schedules (submitted for SEC use only).