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 1, 1999 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 incorporation or organization) Identification No.) 8333 Central Avenue, Newark, 94560-3433 California (Zip Code) (Address of principal executive offices) Registrant's telephone number, (510) 505-4400 including area code 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 May 29, 1999 was 45,661,134.
2 <TABLE> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ROSS STORES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ($000) May 1, January 30, May 2, ASSETS 1999 1999 1998 (Unaudited) (Note A) (Unaudited) <S> <C> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 33,307 $ 80,083 $ 29,725 Accounts receivable 15,199 11,566 10,513 Merchandise inventory 516,107 466,460 460,578 Prepaid expenses and other 16,301 15,825 15,304 _______ _______ _______ Total Current Assets 580,914 573,934 516,120 PROPERTY AND EQUIPMENT Land and buildings 48,937 48,789 24,183 Fixtures and equipment 225,571 217,629 196,609 Leasehold improvements 146,020 142,716 145,849 Construction-in-progress 30,878 32,023 24,563 _______ _______ _______ 451,406 441,157 391,204 Less accumulated depreciation and amortization 201,613 192,445 186,951 _______ _______ _______ 249,793 248,712 204,253 Deferred income taxes and other assets 50,439 47,660 40,934 _______ _______ _______ TOTAL ASSETS $881,146 $870,306 $761,307 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $253,473 $248,103 $216,013 Accrued expenses and other 122,549 114,151 93,164 Accrued payroll and benefits 31,262 40,885 27,773 _______ _______ _______ Total Current Liabilities 407,284 403,139 336,950 Long-term liabilities 45,570 42,464 40,085 STOCKHOLDERS' EQUITY Common stock 458 462 478 Additional paid-in capital 217,867 215,831 199,008 Retained earnings 209,967 208,410 184,786 _______ _______ _______ 428,292 424,703 384,272 ________ ________ ________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $881,146 $870,306 $761,307 </TABLE> See notes to condensed consolidated financial statements.
3 <TABLE> ROSS STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS Three Months Ended ____________________ May 1, May 2, ($000 except per share data, unaudited) 1999 1998 <S> <C> <C> Sales $550,825 $484,276 Costs and Expenses Cost of goods sold and occupancy 379,378 336,816 General, selling and administrative 106,192 94,057 Depreciation and amortization 9,320 7,882 Interest income (162) (135) 494,728 438,620 Earnings before taxes 56,097 45,656 Provision for taxes on earnings 21,934 17,806 Net earnings $34,163 $27,850 Net earnings per share: Basic $.74 $.58 Diluted $.73 $.57 Weighted average shares outstanding: Basic 45,964 47,849 Diluted 46,740 48,814 Stores open at end of period 355 331 </TABLE> See notes to condensed consolidated financial statements.
4 <TABLE> ROSS STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended May 1, May 2, ($000, unaudited) 1999 1998 <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITES Net earnings $34,163 $27,850 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 9,320 7,882 Other amortization 2,498 2,412 Change in assets and liabilities: Merchandise inventory (49,647) (41,753) Other current assets - net (4,109) (2,587) Accounts payable 8,376 16,651 Other current liabilities - net (10,882) (3,698) Other 1,025 1,519 _________ ________ Net cash provided by (used in) operating activities (9,256) 8,276 CASH FLOWS FROM INVESTING ACTIVITES Additions to property and equipment (17,247) (11,519) ________ ________ Net cash used in investing activities (17,247) (11,519) CASH FLOWS FROM FINANCING ACTIVITES Borrowing under lines of credit 15,600 5,700 Issuance of common stock related to stock plans 3,118 3,937 Repurchase of common stock (36,000) (30,418) Dividends paid (2,991) (2,620) ________ ________ Net cash used in financing activities (20,273) (23,401) ________ ________ Net decrease in cash and cash equivalents (46,776) (26,644) Cash and cash equivalents: Beginning of year 80,083 56,369 _______ ________ End of quarter $33,307 $29,725 SUPPLEMENTAL CASH FLOW DISCLOSURES Interest paid $42 $55 Income taxes paid $19,535 $3,934 </TABLE> See notes to condensed consolidated financial statements.
5 ROSS STORES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended May 1, 1999 and May 2, 1998 (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 1, 1999 and May 2, 1998; the interim results of operations for the three months ended May 1, 1999 and May 2, 1998; and changes in cash flows for the three months ended May 1, 1999 and May 2, 1998. The balance sheet at January 30, 1999, presented herein, has been derived from the audited financial statements of the company for the fiscal year then ended. Certain reclassifications have been made to the 1998 presentation to conform to the 1999 presentation. Accounting policies followed by the company are described in Note A to the audited consolidated financial statements for the fiscal year ended January 30, 1999. 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 30, 1999. The results of operations for the three-month period herein presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements at May 1, 1999 and May 2, 1998, 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 reviewed the accompanying condensed consolidated balance sheets of Ross Stores, Inc. (the "Company") as of May 1, 1999 and May 2, 1998, and the related condensed consolidated statements of earnings and 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 30, 1999, 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 12, 1999, 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 30, 1999 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/Deloitte & Touche LLP San Francisco, CA May 21, 1999
7 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 vary significantly 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 1998 Form 10-K. All information is based on the Company's fiscal calendar. RESULTS OF OPERATIONS PERCENTAGE OF SALES Three Months Ended May 1, May 2, 1999 1998 SALES Sales ($000) $550,825 $484,276 Sales growth 13.7% 9.4% Comparable store sales 7% 4% growth COSTS AND EXPENSES Cost of goods sold and occupancy 68.9% 69.6% General, selling and administrative 19.3% 19.4% Depreciation and amortization 1.7% 1.6% Interest income (0%) (0%) NET EARNINGS 6.2% 5.8% Sales The increase in sales for the three months ended May 1, 1999, compared to the same period in the prior year, reflects an increase in the number of stores open during the current period as well as an increase in comparable store sales. Costs and Expenses Cost of goods sold and occupancy expenses as a percentage of sales for the three months ended May 1,1999 decreased compared to the same period in the prior year, primarily due to (i) leverage on occupancy costs realized from the increase in comparable store sales; and (ii) improved merchandise margins, mainly from higher initial markups. The decrease in general, selling and administrative expenses as a percentage of sales for the three months ended May 1, 1999, compared to the same period in the prior year, primarily reflects leverage realized from the increase in comparable store sales.
8 Net Earnings The increase in net earnings as a percentage of sales in the three months ended May 1, 1999, compared to the same period in the prior year, is primarily due to the improvement in the cost of goods sold and occupancy expenses ratio. Income Taxes Paid The company paid $19.5 million in income taxes in the quarter ended May 1, 1999, versus $3.9 million in the quarter ended May 2, 1998. This increase in income taxes paid primarily resulted from the timing of certain tax deductions taken by the company related to its employee common stock plans. The Company's effective tax rate in each quarter was approximately 39%. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The primary uses of cash during the three months ended May 1, 1999 were for (i) the purchase of inventory; (ii) the repurchase of the company's common stock; and (iii) capital expenditures for new stores, improvements to existing locations, improvements in management information systems, and various expenditures to improve the central office and distribution centers. Total consolidated inventories increased 12% at May 1, 1999 from May 2, 1998, due mainly to a 7% 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 May 1, 1999 from May 2, 1998 resulted mainly from the higher level of inventory purchases over the prior year. The increase in accrued expenses and other in these same periods is due primarily to higher sales tax accruals, an increase in short-term borrowings and an increase in income taxes payable. In January 1999, the company announced a $120 million common stock repurchase program. In the three months ended May 1, 1999, the company repurchased approximately 828,000 shares for an aggregate purchase price of approximately $36 million. The company believes it can fund its operating cash requirements and capital needs for the balance of this fiscal year (and for the next fiscal year) through internally generated cash, trade credit, established bank lines and lease financing. YEAR 2000 MATTERS The year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Certain information technology systems and their associated software ("IT Systems"), and certain equipment that uses programmable logic chips to control aspects of their operation ("embedded chip equipment"), may recognize "00" as a year other than the year 2000. Some IT Systems and embedded chip equipment used by the company and by third parties who do business with the company contain two-digit programming to define a year. The year 2000 issue could result, at the company and elsewhere, in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or to engage in other normal business activities. Readiness for Year 2000 The company is addressing its year 2000 issue, including efforts relating to IT Systems and embedded chip equipment used within the company, efforts to address issues the company faces if third parties who do business with the company are not prepared for the year 2000, and contingency planning. In 1997, the company created a corporation-wide year 2000 task force
9 representing all business and staff units with the goal of achieving an uninterrupted transition into the year 2000. The company is using both internal and external resources to identify, correct, upgrade or replace and test its IT Systems and embedded chip equipment for year 2000 compliance. The company uses a variety of IT Systems, internally developed and third-party provided software and embedded chip equipment, depending upon business function and location. For these IT Systems, software and embedded chip equipment, the company has divided its year 2000 efforts into four phases: (i) identification and inventorying of IT Systems and embedded chip equipment with potential year 2000 problems; (ii) assessment of scope of year 2000 issues for, and assigning priorities to, each item based on its importance to the company's operations; (iii) remediation of year 2000 issues in accordance with assigned priorities, by correction, upgrade, replacement or retirement; (iv) testing for and validation of year 2000 compliance, including integration testing. Phases (i) and (ii) are complete across all business functions and locations. The company has categorized as "mission critical" those IT Systems and embedded chip equipment whose failure would cause cessation of store operations, or could otherwise have a sustained and significant detrimental financial impact on the company. All mission critical IT Systems either are currently in phase (iv) or have been completed through phase (iv). The majority of embedded chip equipment is in phase (iv). As of May 1999, over 90% of the company's mission critical IT Systems were determined to be year 2000 compliant, or replacements, changes, upgrades or workarounds have been identified, tested and deployed. The company is in the process of conducting a comprehensive program of integration testing of its IT Systems in order to ensure that all systems still work together properly and without year 2000 problems. This integration testing began in the third quarter of 1998 and will be completed by mid-1999. The company's operations are also dependent on the year 2000 readiness of third parties that do business with the company. In particular, the company's IT Systems interact with commercial electronic transaction processing systems to handle customer credit card purchases and other point-of-sale transactions, and the company is dependent on third-party suppliers of such infrastructure elements as, but not limited to, telecommunications services, electric power, water and banking facilities. The company does not depend to any significant degree on any single merchandise vendor or upon electronic transaction processing with individual vendors for merchandise purchases. The company has identified and initiated formal communications with these third parties to determine the extent to which the company will be vulnerable to such parties' failure to resolve their own year 2000 issues. The company has received responses from over 90% of those suppliers and merchandise vendors that it believes are highly critical to its year 2000- remediation efforts. As a follow-up, the company plans to seek to determine whether the supplier is taking appropriate steps to achieve year 2000 readiness and to be prepared to continue functioning effectively as a supplier in accordance with the company's business needs. The company is assessing its risks with respect to failure by third parties to be year 2000 compliant and intends to seek to mitigate those risks. The company is also developing contingency plans, discussed below, to address issues related to suppliers the company determines are not making sufficient progress toward becoming year 2000 compliant. Costs The company estimates that its IT Systems and embedded chip equipment 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, including about $6.0 million for capital investments in IT Systems and embedded chip equipment, and are expected to be funded through operating cash flows. Operating costs related to year 2000 compliance projects will be incurred over several quarters and will be expensed as incurred. In 1998, the company incurred approximately $4.0 million in expenses related to year 2000, with approximately $2.0 million expected in fiscal 1999. Capital expenditures in 1998 totaled approximately $4.0 million with approximately $2.0 million in capital expenditures expected in fiscal 1999. The company's estimates of the costs of achieving year 2000 compliance and the date by which year 2000 compliance will be achieved are based on management's best estimates, which were derived using numerous assumptions about future events including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no assurance that these estimates will be achieved, and actual results could differ materially from these estimates. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in year 2000 remediation work, the ability to locate and correct all relevant computer codes, the success achieved by the company's suppliers in reaching year 2000 readiness, the timely availability of necessary replacement items and similar uncertainties. Risks The company expects to implement the changes necessary to address the year 2000 issue for IT Systems and embedded chip equipment used within the company. The company presently believes that, with modifications to existing software, conversions to new software, and appropriate remediation of embedded chip equipment, the year 2000 issue with respect to the company's IT Systems and embedded chip equipment is not reasonably likely to pose significant operational problems for the company. However, if unforeseen difficulties arise or such modifications, conversions and replacements are not completed timely, or if the company's vendors' or suppliers' systems are not modified to become year 2000 compliant, the year 2000 issue may have a material impact on the results of operations and financial condition of the company. The company is presently unable to assess the likelihood that the company will experience significant operational problems due to unresolved year 2000 problems of third parties that do business with the company. Although the company has not been put on notice that any known third-party problem will not be timely resolved, the company has limited information and no assurance of additional information concerning the year 2000 readiness of third parties. The resulting risks to the company's business are very difficult to assess due to the large number of variables involved. If third parties fail to achieve year 2000 compliance, year 2000 problems could have a material impact on the company's operations. Similarly, there can be no assurance that the company can timely mitigate its risks related to a supplier's failure to resolve its year 2000 issues. If such mitigation is not achievable, year 2000 problems could have a material impact on the company's operations. Contingency Plans The company presently believes that its most reasonably likely worst-case year 2000 scenarios would relate to the possible failure in one or more geographic regions of third party systems over which the company has no control and for which the company has no ready substitute, such as, but not limited to, power and telecommunications services. For example, if such services were to fail, it could be necessary for the company to temporarily close stores in the affected geographic areas. The company has in place a business resumption plan that addresses recovery from various kinds of disasters, including recovery from significant interruptions to data flows and distribution capabilities at the company's major data systems centers and major distribution centers. The company is using that plan as a starting point for developing specific year 2000 contingency plans, which will generally emphasize locating alternate sources of supply, methods of distribution and ways of processing information. The company expects its year 2000 contingency plans will be substantially complete by the end of the second quarter of fiscal year 1999. However, there can be no assurance that the company will be able to complete its contingency planning on that schedule.
11 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, 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 and greater than planned costs, including those that could be related to necessary modifications to or replacements of the company's IT Systems and embedded chip equipment to enable them to process information with dates or date ranges spanning the year 2000 and beyond. If unforeseen difficulties arise or such modifications and replacements are not completed timely, or if the company's vendors' or suppliers' IT Systems and embedded chip equipment are not modified to become year 2000 compliant, the year 2000 issue may have a material impact on the operations of the company. In addition, the company's corporate headquarters, one of its distribution centers and 44% 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. Intensified price competition, lower than anticipated consumer demand or other factors, if they were to occur during the third and fourth quarters, and in particular during the fourth quarter, could adversely affect the company's fiscal year results. 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 May 1, 1999 is not material.
12 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 13 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 14, 1999 /s/John G. Call John G. Call, Senior Vice President, Chief Financial Officer and Principal Accounting Officer
13 INDEX TO EXHIBITS Exhibit Number Exhibit 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. 10.36 Consulting Agreement between Ross Stores and Stuart G. Moldaw, effective as of April 1, 1999, through March 31, 2002. 10.37 Employment Agreement between Ross Stores and Michael Hamilton, effective as of March 1, 1999, through March 1, 2002. 10.38 Employment Agreement between Ross Stores and James Fassio, effective as of April 1, 1999, through April 1, 2002. 15 Letter re: Unaudited Interim Financial Information. 27 Financial Data Schedules (submitted for SEC use only).