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 November 1, 1997 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, 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 November 29, 1997 was 47,643,824. 1
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ROSS STORES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------- ($000) November 1, February 1, November 2, ASSETS 1997 1997 1996 - -------------------------------------------------------------------------------------------------- <S> <C> <C> <C> (Unaudited) (Note A) (Unaudited) CURRENT ASSETS Cash and cash equivalents $21,737 $44,777 $25,305 Accounts receivable 9,720 7,832 11,618 Merchandise inventory 467,947 373,689 401,813 Prepaid expenses and other 14,518 13,289 13,269 -------- -------- -------- Total Current Assets $513,922 439,587 452,005 PROPERTY AND EQUIPMENT Land and buildings 24,115 24,115 24,115 Fixtures and equipment 184,265 164,980 160,539 Leasehold improvements 142,598 135,810 124,783 Construction-in-progress 11,120 23,798 28,922 -------- -------- -------- 362,098 348,703 338,359 Less accumulated depreciation and amortization 171,779 156,056 152,468 -------- -------- -------- 190,319 192,647 185,891 Deferred income taxes and other assets 32,802 27,244 22,482 -------- -------- -------- $737,043 $659,478 $660,378 - -------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable $205,249 $184,101 $196,929 Accrued expenses and other 98,936 61,761 61,936 Accrued payroll and benefits 42,740 36,356 35,464 Income taxes payable 4,108 22,567 14,018 -------- -------- -------- Total Current Liabilities 351,033 304,785 308,347 Long-term debt 25,000 10,000 Deferred income taxes and other liabilities 32,089 25,850 29,365 STOCKHOLDERS' EQUITY Capital stock 479 493 498 Additional paid-in capital 168,595 164,166 156,293 Retained earnings 159,847 164,184 155,875 -------- -------- -------- 328,921 328,843 312,666 -------- -------- -------- $737,043 $659,478 $660,378 -------- -------- -------- -------- -------- -------- </TABLE> See notes to condensed consolidated financial statements. 2
ROSS STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------------ -------------------------- November 1, November 2, November 1, November 2, ($000 except per share data, unaudited) 1997 1996 1997 1996 - --------------------------------------- --------- ---------- ---------- ---------- <S> <C> <C> <C> <C> SALES $482,875 $403,383 $1,416,395 $1,179,987 COSTS AND EXPENSES Cost of goods sold and occupancy 334,965 283,797 985,587 833,472 General, selling and administrative 98,080 85,043 280,300 243,025 Depreciation and amortization 7,866 7,363 22,776 21,788 Interest expense (income) 206 (77) (277) 138 --------- ---------- ---------- ---------- 441,117 376,126 1,288,386 1,098,423 Earnings before taxes 41,758 27,257 128,009 81,564 Provision for taxes on earnings 16,703 10,903 51,203 32,626 --------- ---------- ---------- ---------- Net earnings $25,055 $16,354 $76,806 $48,938 --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- Net earnings per share: Primary $.50 $.32 $1.52 $.95 Fully diluted $.50 $.32 $1.52 $.95 --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- Weighted average shares outstanding: Primary 49,841 51,250 50,400 51,514 Fully diluted 49,920 51,354 50,578 51,744 --------- ---------- ---------- ---------- Stores open at end of period 326 313 --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- </TABLE> See notes to condensed consolidated financial statements. 3
ROSS STORES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Nine Months Ended -------------------------- November 1, November 2, ($000, unaudited) 1997 1996 - ----------------- --------- --------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $76,806 $48,938 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 22,776 21,788 Other amortization 6,261 4,923 Change in current assets and current liabilities: Merchandise inventory (94,258) (105,848) Other current assets - net (3,118) (3,816) Accounts payable 23,368 61,012 Other current liabilities - net 7,720 33,246 Other 1,290 5,683 --------- --------- Net cash provided by operating activities 40,845 65,926 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (26,712) (33,188) --------- --------- Net cash used in investing activities (26,712) (33,188) --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowing under line of credit agreement 22,400 12,700 Proceeds (Repayment) of long-term debt 24,941 (9,835) Issuance of common stock related to stock plans 8,115 29,352 Repurchase of common stock (85,965) (57,797) Dividends paid (6,664) (5,279) --------- --------- Net cash used in financing activities (37,173) (30,859) --------- --------- NET INCREASE (DECREASE) IN CASH (23,040) 1,879 Cash Beginning of year 44,777 23,426 End of quarter $21,737 $25,305 --------- --------- Interest Paid $130 $660 Income Taxes Paid $69,976 $29,163 --------- --------- --------- --------- </TABLE> See notes to condensed consolidated financial statements. 4
ROSS STORES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three and Nine Months Ended November 1, 1997 and November 2, 1996 (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 November 1, 1997 and November 2, 1996; the interim results of operations for the three and nine months ended November 1, 1997 and November 2, 1996; and changes in cash flows for the nine months ended November 1, 1997 and November 2, 1996. The balance sheet at February 1, 1997, 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 1, 1997. 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 February 1, 1997. The results of operations for the three and nine month periods herein presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements at November 1, 1997 and November 2, 1996, and for the three and nine 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. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, (SFAS 128), Earnings per Share (EPS). SFAS 128 requires dual presentation of basic EPS and diluted EPS on the face of all income statements issued after December 15, 1997 for all entities with complex capital structures. Basic EPS is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. The pro forma effect assuming adoption of SFAS 128 at the beginning of each period is presented below. Three Months Ended Nine Months Ended -------------------------- ------------------------- November 1, November 2, November 1, November 2, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Pro forma EPS: Basic $.51 $.33 $1.56 $.97 Diluted $.50 $.32 $1.52 $.95 5
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 November 1, 1997 and November 2, 1996, and the related condensed consolidated statements of earnings for the three-month and nine-month periods then ended and the related condensed consolidated statements of cash flows for the nine-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 objectives 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 1, 1997, 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 7, 1997, 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 1, 1997 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 November 21, 1997 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS PERCENTAGE OF SALES <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------------- -------------------------- November 1, November 2, November 1, November 2, 1997 1996 1997 1996 --------- --------- ----------- ----------- <S> <C> <C> <C> <C> SALES Sales ($000) $482,875 $403,383 $1,416,395 $1,179,987 Sales growth 20% 22% 20% 20% Comparable store sales growth 12% 14% 12% 12% COSTS AND EXPENSES Cost of goods sold and occupancy 69.4% 70.4% 69.6% 70.6% General, selling and administrative 20.3% 21.1% 19.8% 20.6% Depreciation and amortization 1.6% 1.8% 1.6% 1.8% Interest expense (income) 0% (0%) (0%) 0% NET EARNINGS 5.2% 4.1% 5.4% 4.1% --------- --------- ----------- ----------- --------- --------- ----------- ----------- </TABLE> SALES The results of operations for the three and nine months ended November 1, 1997, over the same periods 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 declines from the prior year in cost of goods sold and occupancy expense as a percentage of sales for the three and nine month periods ended November 1, 1997 were primarily due to stronger than planned comparable store increases which contributed to (i) lower markdowns as a percentage of sales and (ii) increased leverage on occupancy expenses. General, selling and administrative expenses as a percentage of sales also declined from the comparable periods in the prior year. This improvement was due to the company's continued focus on strict expense controls combined with the leverage realized on the strong increase in comparable store sales. The company's effective tax rate for the third quarter of 1997 and 1996 was 40%. The rate for both periods reflects the applicable statutory tax rates. Net earnings for the three months ended November 1, 1997, totaled $25.1 million, or $.50 per share, compared to net earnings of $16.4 million, or $.32 per share, for the three months ended November 2, 1996. Net earnings for the nine months ended November 1, 1997, totaled $76.8 million, or $1.52 per share, compared to net earnings of $48.9 million, or $.95 per share, for the nine months ended November 2, 1996. 7
LIQUIDITY AND CAPITAL RESOURCES The primary uses of cash during the first nine months of fiscal 1997 were for (i) an increase in 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 increased 16% at November 1, 1997 from November 2, 1996 due mainly to an increase in the number of stores and higher levels of seasonal packaway merchandise. In September 1997, the company entered into a five year lease for an approximately 214,500 square foot warehouse building located in Newark, California which will store the company's packaway merchandise. This building is expected to replace third party warehousing services used by the company on the West Coast. An increase in deferred compensation was the primary driver in the increase over the prior year in deferred income taxes and other liabilities. The increase in accrued expenses primarily results from the timing of payments for expenses related to the volume of business. The increase in payroll reflects the accruals for the company's incentive plan. The decrease in income taxes payable results from the timing of stock option exercises and the impact of the corresponding tax deduction on estimated income tax payments. The increase in long-term debt and interest expense compared to the prior year resulted from higher average borrowings to fund the repurchase of common stock. The stock repurchase program, approved by the Board of Directors in January 1997, was completed in November 1997. The company repurchased a total of 3,000,000 shares for an aggregate purchase price of approximately $98 million. In September 1997, the company entered into a new revolving credit facility for $160 million plus a separate $30 million letter of credit facility (the "Facilities"). The Facilities replace both the Revolving Credit Agreement, dated July 31, 1993, with Wells Fargo Bank, National Association, as amended and the Credit Agreement, dated as of June 22, 1994 with Bank of America National Trust and Savings Association, as amended. The company believes it can fund its capital needs for the remainder of the fiscal year and the next twelve months through internally generated cash, trade credit, established bank lines and lease financing. The company, in conjunction with an outside vendor, is assessing the extent of the necessary modifications to its computer hardware and software systems to enable them to process information beyond 1999. The costs of the modifications, which are currently unknown, are being determined as part of the assessment and will be expensed as incurred. 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. 8
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 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. 10.3 Letter of Credit Agreement, dated September 15, 1997, between Ross Stores and Bank of America. 10.4 Amendment to Credit Agreement, dated as of October 7, 1997 between Ross Stores and Bank of America. MANAGEMENT CONTRACTS AND COMPENSATORY PLANS (EXHIBITS 10.5 - 10.32) 10.5 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"). 10.6 Third Amended and Restated Ross Stores Employee Stock Purchase Plan, incorporated by reference to the appendix to the 1995 Proxy Statement. 10.7 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"). 10.8 1991 Outside Directors Stock Option Plan, incorporated by reference to the appendix to the 1996 Proxy Statement. 10.9 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"). 10.10 Third Amended and Restated Ross Stores Executive Supplemental Retirement Plan, incorporated by reference to Exhibit 10.14 to the 1993 Form 10-K. 10.11 Ross Stores Non-Qualified Deferred Compensation Plan, incorporated by reference to Exhibit 10.15 to the 1993 Form 10-K. 10.12 Ross Stores Incentive Compensation Plan, incorporated by reference to the appendix to the 1996 Proxy Statement. 9
Exhibit Number Exhibit ------ ------- 10.13 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. 10.14 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. 10.15 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. 10.16 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. 10.17 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. 10.18 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. 10.19 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. 10.20 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. 10.21 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. 10.22 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. 10.23 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
Exhibit Number Exhibit ------ ------- 10.24 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. 10.25 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. 10.26 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. 10.27 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. 10.28 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. 10.29 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. 10.30 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. 10.31 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. 10.32 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. 11 Statement re: Computation of Per Share Earnings. 15 Letter re: Unaudited Interim Financial Information. 27 Financial Data Schedules (submitted for SEC use only). 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: December 12, 1997 /s/John G. Call John G. Call, Senior Vice President, Chief Financial Officer and Principal Accounting Officer 12