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 AUGUST 3, 1996 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 94-1390387 of 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, including area code (510) 505-4400 Former name, former address and N/A former 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 August 31, 1996 was 25,080,634.
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <TABLE> ROSS STORES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS <CAPTION> ($000) August 3, February 3, July 29, ASSETS 1996 1996 1995 (Unaudited) (Note A) (Unaudited) <S> <C> <C> <C> Current Assets Cash and cash equivalents $ 35,080 $ 23,426 $ 25,493 Accounts receivable 15,071 9,901 8,206 Merchandise inventory 357,778 295,965 303,659 Prepaid expenses and other 12,489 13,474 11,048 ________ ________ ________ Total Current Assets 420,418 342,766 348,406 Property And Equipment Land and buildings 24,115 24,102 24,101 Fixtures and equipment 155,084 156,811 148,584 Leasehold improvements 123,672 123,829 115,184 Construction-in-progress 20,035 16,808 9,067 ________ ________ ________ 322,906 321,550 296,936 Less accumulated depreciation and amortization 144,685 140,174 128,208 ________ ________ ________ 178,221 181,376 168,728 Other assets 16,555 17,010 17,962 ________ ________ ________ $615,194 $541,152 $535,096 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $175,821 $137,653 $ 128,925 Accrued expenses and other 45,840 42,944 40,574 Accrued payroll and benefits 33,574 30,064 22,916 Income taxes payable 16,427 10,555 7,180 ________ ________ ________ Total Current Liabilities 271,662 221,216 199,595 Long-term debt 9,665 9,806 45,940 Deferred income taxes and other 18,773 18,614 21,426 liabilities Stockholders' Equity Capital stock 252 246 246 Additional paid-in capital 153,745 133,409 127,026 Retained earnings 161,097 157,861 140,863 ________ ________ ________ 315,094 291,516 268,135 ________ ________ ________ $615,194 $541,152 $535,096 </TABLE> ________ See notes to condensed consolidated financial statements.
3 <TABLE> ROSS STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS <CAPTION> Three Months Ended Six Months Ended ($000 except per share data, unaudited) August 3, July 29, August 3, July 29, 1996 1995 1996 1995 <S> <C> <C> <C> <C> Sales $ 405,656 $ 351,202 $ 776,604 $648,637 Costs and Expenses Cost of goods sold and occupancy 285,618 254,230 549,675 472,849 General, selling and administrative 81,762 72,036 157,982 136,695 Depreciation and amortization 7,164 6,758 14,425 13,443 Interest 31 951 215 1,979 ________ _________ ________ _________ $374,575 $333,975 $722,297 $624,966 Earnings before taxes 31,081 17,227 54,307 23,671 Provision for taxes on earnings 12,432 6,891 21,723 9,468 _______ _________ ________ _________ Net earnings $18,649 $ 10,336 $ 32,584 $ 14,203 Net earnings per share: Primary $ .72 $ .42 $ 1.26 $ .58 Fully diluted $ .72 $ .42 $ 1.26 $ .57 Weighted average shares outstanding: Primary 25,929 24,686 25,806 24,670 Fully diluted 25,930 24,726 25,815 24,709 Stores open at end of period 299 282 </TABLE> See notes to condensed consolidated financial statements.
4 <TABLE> ROSS STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <CAPTION> Six Months Ended ($000, unaudited) August 3, July 29, 1996 1995 <S> <C> <C> Cash Flows From Operating Activities Net earnings $ 32,584 $ 14,203 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization of property and equipment 14,425 13,443 Other amortization 3,100 2,489 Change in current assets and current liabilities: Merchandise inventory (61,814) (28,477) Other current assets - net (4,185) (1,738) Accounts payable 39,904 20,806 Other current liabilities - net 16,414 3,000 Other 1,090 1,760 ________ ________ Net cash provided by operating activities 41,518 25,486 Cash Flows From Investing Activities Additions to property and equipment (16,335) (19,341) _________ _________ Net cash used in investing activities (16,335) (19,341) Cash Flows From Financing Activities (Repayment) of long-term debt (170) (128) Issuance of common stock related to stock plan 24,413 220 Repurchase of common stock (34,252) (1,385) Dividends paid (3,520) (2,940) ________ _______ Net cash (used in) financing activities (13,529) (4,233) ________ _______ Net Increase In Cash 11,654 1,912 Cash Beginning of year 23,426 23,581 ________ ________ End of quarter $ 35,080 $ 25,493 </TABLE> See notes to condensed consolidated financial statements.
5 ROSS STORES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three and Six Months Ended August 3, 1996 and July 29, 1995 (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 August 3, 1996 and July 29, 1995; the interim results of operations for the three and six months ended August 3, 1996 and July 29, 1995; and changes in cash flows for the six months then ended. The balance sheet at February 3, 1996, 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 February 3, 1996. 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 February 3, 1996. The results of operations for the three 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 August 3, 1996 and July 29, 1995, and for the three 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. NOTE B - STATEMENTS OF CASH FLOWS SUPPLEMENTAL DISCLOSURES Total cash paid for interest and income taxes is as follows: Six Months Ended ($000, unaudited) August 3, 1996 July 29, 1995 Interest $ 570 $ 2,141 Income Taxes $ 15,851 $ 7,027
6 INDEPENDENT AUDITORS' 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 August 3, 1996 and July 29, 1996, and the related condensed consolidated statements of earnings for the three-month and six-month periods then ended and the related condensed consolidated statements of cash flows for the 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 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 February 3, 1996, 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 15, 1996, 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 February 3, 1996 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 August 23, 1996
7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STORES On July 31, 1996, the company announced that it entered into an agreement with the TJX Companies ("TJX") to acquire the leasehold rights to all six of TJX's off-price stores in the state of Hawaii. Five stores are former Marshalls locations, all of which will be converted to the Ross concept and are scheduled to re-open in November 1996. The sixth location, a TJ Maxx store, will be closed. With its two existing Hawaii locations, Ross will now operate a total of seven stores in the state, providing economies of scale in distribution, supervision and advertising expenses. With these additional stores, the company plans to open a total of 21 stores this year. After closing four older locations in January 1997, the company expects to operate 309 stores at the end of fiscal 1996. <TABLE> RESULTS OF OPERATIONS <CAPTION> PERCENTAGE OF SALES Three Months Ended Six Months Ended August 3, July 29, August 3, July 29, 1996 1995 1996 1995 <S> <C> <C> <C> <C> SALES Sales ($000) $405,656 $351,202 $776,604 $648,637 Sales growth 15.5% 12.5% 19.7% 12.5% Comparable store sales growth 9% 1% 11% 1% COSTS AND EXPENSES Cost of goods sold and occupancy 70.4% 72.4% 70.8% 72.9% General, selling and administrative 20.2% 20.5% 20.3% 21.1% Depreciation and amortization 1.8% 1.9% 1.9% 2.1% Interest 0% .3% 0% .3% NET EARNINGS 4.6% 2.9% 4.2% 2.2% </TABLE> Sales The results of operations for the three and six months ended August 3, 1996, over the same period last year, reflect an increase in the level of sales which was due to the increase in comparable store sales as well as a greater number of open stores during the current period. Costs and Expenses The decline from the prior year in the cost of goods sold and occupancy as a percentage of sales for the three and six month periods was primarily due to (i) an increase in the initial mark-up from purchasing more opportunistically; (ii) lower markdowns as a percentage of sales; and (iii) leverage on occupancy costs.
8 General, selling and administrative expenses as a percentage of sales also declined 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 strong comparable store sales gain of 9% which was partially offset by higher accruals for the company's incentive plan and increased distribution costs. Net earnings for the three months ended August 3, 1996, totaled $18.6 million, or $.72 per share, compared to net earnings of $10.3 million, or $.42 per share, for the three months ended July 29, 1995. In August of this year, Congress passed the Minimum Wage Act of 1996 which raised the federal minimum wages from $4.25 per hour to $4.75 per hour. This increase becomes effective October 1, 1996 and is not expected to have a material impact on the company's labor costs. Taxes on Earnings The company's effective tax rate for the second quarter of 1996 and 1995 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 six months of fiscal 1996 were for (i) purchase of inventory, (ii) repurchase of the company's common stock, and (iii) capital expenditures for new stores, improvements to existing locations and improvements in operating systems. Total consolidated inventories were up 18% at the end of the second quarter from last year due mainly to an increase in the number of new stores planned in 1996 and higher levels of opportunistic purchases of seasonal packaway merchandise. The increased purchases of packaway inventories at the end of the quarter also contributed to the higher level of accounts payable at the end of the period. The increase in the accounts receivable reflects an increase in deferred compensation and an increase in credit card sales which were in line with the higher volume in business relative to last year. The decline in interest expense reflects the decline in borrowings which resulted primarily from higher earnings levels, the higher levels of accounts payable, lower capital and income from stock option exercises. On August 30, 1996, the company paid in full the outstanding balance on the mortgage loan for the company's East Coast distribution center in Carlisle, Pennsylvania. The outstanding principal and accrued interest paid was $9.7 million. The company believes it can fund its capital needs for the remainder of the fiscal year and complete the current stock repurchase program through internally generated cash, trade credit, established bank lines and lease financing.
9 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual meeting of Stockholders held on May 30, 1996 (the "1996 Annual Meeting"), the stockholders of the company voted on and approved the following proposals: Proposal 1 to reelect three Class I Directors for a three year term. Proposal 2 to approve the amendment to the 1988 Restricted Stock Plan to increase the share reserve by 1,000,000 shares. Proposal 3 to approve the amendment to the 1991 Outside Directors Stock Option Plan to increase the share reserve by 50,000 shares. Proposal 4 to approval the company's Incentive Compensation Plan. Proposal 5 to ratify the appointment of Deloitte & Touche LLP as the company's certified public accountants for the fiscal year ending February 1, 1997. INFORMATION ON THE BOARD OF DIRECTORS Stuart G. Moldaw, Donald H. Seiler and George P. Orban were the nominees reelected at the 1996 Annual Meeting as the company's Class 1 Directors whose terms expire in 1999. The following are the company's directors who were not up for reelection and whose terms of office continues after the 1996 Annual Meeting: incumbent Class II Directors whose terms expire in 1997: Donna L. Weaver, Maynard Jenkins and Michael Balmuth; and incumbent Class III Directors whose terms expire in 1998: Norman A. Ferber, Philip Schlein and Melvin A. Wilmore. 1996 ANNUAL MEETING ELECTION RESULTS Proposal 1 BROKER ELECTION OF DIRECTORS IN FAVOR WITHHELD NON-VOTES Stuart G. Moldaw 22,163,223 663,501 N/A Donald H. Seiler 22,275,101 551,623 N/A George P. Orban 22,288,363 538,361 N/A Proposals 2,3,4, and 5 BROKER PROPOSAL FOR AGAINST ABSTAIN NON-VOTES Amendment to the 1988 12,983,005 9,499,294 319,775 24,650 Restricted Stock Plan Amendment to 1991 Outside 15,065,990 7,421,193 313,391 26,150 Directors Stock Option Plan Amendment to Incentive 22,281,219 193,547 325,808 26,150 Compensation Plan Appointment of Deloitte & 22,802,804 10,788 13,132 N/A Touch LLP
10 ITEM 5. OTHER INFORMATION Effective September 1, 1996, Norman A. Ferber stepped down as Chief Executive Officer of the company and became a consultant to the company. Michael Balmuth, the company's former Executive Vice President, Merchandising, succeeded Mr. Ferber as Chief Executive Officer. Melvin A. Wilmore remains as President and Chief Operating Officer. Mr. Ferber continues as Chairman of the Board. 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 10 of this Report. (b) Reports on Form 8-K None.
11 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 13, 1996 /s/John M. Vuko John M. Vuko, Senior Vice President, Controller and Principal Accounting Officer
12 INDEX TO EXHIBITS Exhibit Number Exhibit 3.1 Certificate of Incorporation, as amended, incorporated by reference to Exhibit 3.1 to the Registration Statement on Form 8-B (the "Form 8-B") filed September 1, 1989 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 Revolving Credit Agreement, dated July 31, 1993, among Ross Stores, Wells Fargo Bank, National Association, Bank of America, National Trust and Savings Association, and Security Pacific National Bank ("Banks"); and Wells Fargo Bank, National Association, as agent for Banks, incorporated by reference to Exhibit 10.17 on the Form 10-Q filed by Ross Stores for its quarter ended July 31, 1993. 10.3 First Amendment to Revolving Credit Agreement, effective on July 31, 1994, by and among Ross Stores, Banks and Wells Fargo Bank, National Association, as agent for Banks, incorporated by reference to Exhibit 10.5 to the Form 10-Q filed by Ross Stores for its quarter ended July 30, 1994. 10.4 Second Amendment to Revolving Credit Agreement, effective on June 15, 1995, by and among Ross Stores, Banks and Wells Fargo Bank, National Association, as agent for Banks, incorporated by reference to Exhibit 10.4 to the Form 10-Q filed by Ross Stores for its quarter ended July 29, 1995. 10.5 Credit Agreement, dated as of June 22, 1994, among Ross Stores, Bank of America National Trust and Savings Association as Agent, the Industrial Bank of Japan as Co-Agent and the other financial institutions party thereto, incorporated by reference to Exhibit 10.6 to the Form 10-Q filed by Ross Stores for its quarter ended July 30, 1994. 10.6 First Amendment to Credit Agreement, dated as of June 20, 1995, among Ross Stores, Bank of America National Trust and Savings Association as Agent, the Industrial Bank of Japan as Co-Agent, incorporated by reference to Exhibit 10.6 to the Form 10-Q filed by Ross Stores for its quarter ended July 29, 1995. 10.7 Second Amendment to Credit Agreement, dated as of June 12, 1996, Ross Stores, Bank of America National Trust and Savings Association as Agent, the Industrial Bank of Japan as Co-Agent. MANAGEMENT CONTRACTS AND COMPENSATORY PLANS (EXHIBITS 10.8 - 10.30) 10.8 Amended and Restated 1992 Stock Option 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 ("1995 Proxy Statement").
13 Exhibit Number Exhibit 10.9 Third Amended and Restated Ross Stores Employee Stock Purchase Plan, incorporated by reference to the appendix to the 1995 Proxy Statement. 10.10 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"). 10.11 1991 Outside Directors Stock Option Plan, incorporated by reference to the appendix to the 1996 Proxy Statement. 10.12 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"). 10.13 Third Amended and Restated Ross Stores Executive Supplemental Retirement Plan, incorporated by reference to Exhibit 10.14 to the 1993 Form 10-K. 10.14 Ross Stores Non-Qualified Deferred Compensation Plan, incorporated by reference to Exhibit 10.15 to the 1993 Form 10-K. 10.15 Ross Stores Incentive Compensation Plan, incorporated by reference to the appendix to the 1996 Proxy Statement. 10.16 Amended and Restated Employment Agreement between Ross Stores, Inc. 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. 10.17 Amendment to Amended and Restated Employment Agreement between Ross Stores, Inc. and Norman A. Ferber, entered into July 29, 1996. 10.18 Agreement between Ross Stores, Inc. and Norman A. Ferber, dated August 22, 1995, incorporated by reference to Exhibit 10.18 to the Form 10-Q filed by Ross Stores for its quarter ended October 28, 1995. 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. 10.20 Amendment to Employment and Stock Grant Agreement 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.
14 Exhibit Exhibit Number 10.22 Third Amendment to Employment Agreement by and between Ross Stores and Melvin A. Wilmore, entered into July 29, 1996. 10.23 Agreement between Ross Stores, Inc. and Melvin A. Wilmore, dated August 22, 1995, incorporated by reference to Exhibit 10.22 to the Form 10-Q filed by Ross Stores for its quarter ended October 28, 1995. 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 July 29, 1996. 10.27 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. 10.28 Employment Agreement between Ross Stores and Irene S. 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. 10.29 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. 10.30 Consulting Agreement between Ross Stores and Stuart G. Moldaw, effective as of March 16, 1995, incorporated by reference to Exhibit 10.16 to the Form 10-Q filed by Ross Stores for its quarter ended April 29, 1995. 11 Statement re: Computation of Per Share Earnings. 15 Letter re: Unaudited Interim Financial Information. 27 Financial Data Schedules (submitted for SEC use only).