Company Quick10K Filing
Quick10K
Ross Stores
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$97.01 367 $35,650
10-Q 2019-05-04 Quarter: 2019-05-04
10-K 2019-02-02 Annual: 2019-02-02
10-Q 2018-11-03 Quarter: 2018-11-03
10-Q 2018-08-04 Quarter: 2018-08-04
10-Q 2018-05-05 Quarter: 2018-05-05
10-K 2018-02-03 Annual: 2018-02-03
10-Q 2017-10-28 Quarter: 2017-10-28
10-Q 2017-07-29 Quarter: 2017-07-29
10-Q 2017-04-29 Quarter: 2017-04-29
10-K 2017-01-28 Annual: 2017-01-28
10-Q 2016-10-29 Quarter: 2016-10-29
10-Q 2016-07-30 Quarter: 2016-07-30
10-Q 2016-04-30 Quarter: 2016-04-30
10-K 2016-01-30 Annual: 2016-01-30
10-Q 2015-10-31 Quarter: 2015-10-31
10-Q 2015-08-01 Quarter: 2015-08-01
10-Q 2015-05-02 Quarter: 2015-05-02
10-K 2015-01-31 Annual: 2015-01-31
10-Q 2014-11-01 Quarter: 2014-11-01
10-Q 2014-08-02 Quarter: 2014-08-02
10-Q 2014-05-03 Quarter: 2014-05-03
10-K 2014-02-01 Annual: 2014-02-01
8-K 2019-05-23 Earnings, Exhibits
8-K 2019-05-22 Shareholder Vote
8-K 2019-04-09 Officers, Regulation FD, Exhibits
8-K 2018-11-20 Earnings, Exhibits
8-K 2018-08-23 Earnings, Exhibits
8-K 2018-05-24 Earnings, Exhibits
8-K 2018-05-23 Shareholder Vote
8-K 2018-03-06 Earnings, Exhibits
NDSN Nordson 8,210
PFPT Proofpoint 6,730
SF Stifel Financial 4,170
ROLL RBC Bearings 3,410
ACIA Acacia Communications 2,230
EBSB Meridian Bancorp 927
ATRS Antares Pharma 481
INO Inovio Pharmaceuticals 379
CCSB Community Savings Bancorp 0
INRD Inrad Optics 0
ROST 2019-05-04
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results Of
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 exhibit101formsofexecutive.htm
EX-10.2 exhibit102bremploymentagre.htm
EX-10.3 exhibit103mhemploymentagre.htm
EX-15 exhibit15rossq119awareness.htm
EX-31.1 rost-2019504xex311.htm
EX-31.2 rost-2019504xex312.htm
EX-32.1 rost-2019504xex321.htm
EX-32.2 rost-2019504xex322.htm

Ross Stores Earnings 2019-05-04

ROST 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 rost-2019504x10q.htm Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 2019
o
 
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 incorporation or
 
(I.R.S. Employer Identification No.)
organization)
 
 
 
5130 Hacienda Drive, Dublin, California
 
94568-7579
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number, including area code
 
(925) 965-4400
 
Former name, former address and former fiscal year, if
 
N/A
changed since last report.
 
 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol
 
Name of each exchange on which registered
Common stock, par value $.01
 
ROST
 
Nasdaq Global Select Market

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 ý No o
    
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ý    No o
     
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý     Accelerated filer o Non-accelerated filer o Smaller reporting company o Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý

The number of shares of Common Stock, with $.01 par value, outstanding on May 22, 2019 was 364,695,608.

1



Ross Stores, Inc.
Form 10-Q
Table of Contents

 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 


2



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Statements of Earnings

 
Three Months Ended
($000, except stores and per share data, unaudited)
May 4, 2019


May 5, 2018

Sales
$
3,796,642

 
$
3,588,619

 
 
 
 
Costs and Expenses
 
 
 
Cost of goods sold
2,701,668

 
2,522,219

Selling, general and administrative
558,250

 
524,423

Interest income, net
(5,635
)
 
(503
)
Total costs and expenses
3,254,283

 
3,046,139

 
 
 
 
Earnings before taxes
542,359

 
542,480

Provision for taxes on earnings
121,217

 
124,228

Net earnings
$
421,142

 
$
418,252

 
 
 
 
Earnings per share
 
 
 
Basic
$
1.16

 
$
1.12

Diluted
$
1.15

 
$
1.11

 
 
 
 
 
 
 
 
Weighted average shares outstanding (000)
 
 
 
Basic
363,085

 
373,797

Diluted
365,912

 
377,062

 
 
 
 
 
 
 
 
Stores open at end of period
1,745

 
1,651

The accompanying notes are an integral part of these condensed consolidated financial statements.

3



Condensed Consolidated Statements of Comprehensive Income

 
Three Months Ended
($000, unaudited)
May 4, 2019

 
May 5, 2018

Net earnings
$
421,142

 
$
418,252

 
 
 
 
Other comprehensive (loss) income:
 
 
 
Change in unrealized gain (loss) on investments, net of tax

 
(20
)
Comprehensive income
$
421,142

 
$
418,232

The accompanying notes are an integral part of these condensed consolidated financial statements.

4



Condensed Consolidated Balance Sheets
($000, except share data, unaudited)
May 4, 2019

 
February 2, 2019

 
May 5, 2018

Assets
 
 
 
 
 
Current Assets
 
 
 
 
 
Cash and cash equivalents
$
1,366,592

 
$
1,412,912

 
$
1,302,836

Accounts receivable
121,607

 
96,711

 
109,425

Merchandise inventory
1,813,773

 
1,750,442

 
1,895,456

Prepaid expenses and other
160,733

 
143,954

 
146,362

Total current assets
3,462,705

 
3,404,019

 
3,454,079

 
 
 
 
 
 
Property and Equipment
 
 
 
 
 
Land and buildings
1,129,049

 
1,126,051

 
1,110,278

Fixtures and equipment
2,844,135

 
2,783,198

 
2,621,211

Leasehold improvements
1,139,600

 
1,175,921

 
1,103,712

Construction-in-progress
148,021

 
171,538

 
116,495

  
5,260,805

 
5,256,708

 
4,951,696

Less accumulated depreciation and amortization
2,824,433

 
2,781,507

 
2,582,481

Property and equipment, net
2,436,372

 
2,475,201

 
2,369,215

 
 
 
 
 
 
Operating lease assets
2,942,980

 

 

Other long-term assets
207,063

 
194,471

 
197,542

Total assets
$
9,049,120

 
$
6,073,691

 
$
6,020,836

 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
Current Liabilities
 
 
 
 
 
Accounts payable
$
1,296,183

 
$
1,177,104

 
$
1,299,145

Accrued expenses and other
450,762

 
431,596

 
435,606

Current operating lease liabilities
536,900

 

 

Accrued payroll and benefits
220,376

 
363,035

 
209,570

Income taxes payable
89,290

 
37,749

 
77,323

Current portion of long-term debt

 

 
84,981

Total current liabilities
2,593,511

 
2,009,484

 
2,106,625

 
 
 
 
 
 
Long-term debt
312,552

 
312,440

 
312,105

Non-current operating lease liabilities
2,514,530

 

 

Other long-term liabilities
226,788

 
321,713

 
362,445

Deferred income taxes
134,213

 
124,308

 
109,373

 
 
 
 
 
 
Commitments and contingencies


 


 


 
 
 
 
 
 
Stockholders’ Equity
 
 
 
 
 
Common stock, par value $.01 per share
Authorized 1,000,000,000 shares
Issued and outstanding 365,260,000, 368,242,000
and 377,079,000 shares, respectively
3,653

 
3,682

 
3,771

Additional paid-in capital
1,391,558

 
1,375,965

 
1,312,705

Treasury stock
(423,543
)
 
(372,663
)
 
(363,077
)
Accumulated other comprehensive income

 

 
7

Retained earnings
2,295,858

 
2,298,762

 
2,176,882

Total stockholders’ equity
3,267,526

 
3,305,746

 
3,130,288

Total liabilities and stockholders’ equity
$
9,049,120

 
$
6,073,691

 
$
6,020,836

The accompanying notes are an integral part of these condensed consolidated financial statements.

5



Condensed Consolidated Statements of Stockholders' Equity

 
 
 
 
 
 
Additional paid-in capital

 
 
 
Accumulated
other comprehensive income (loss)

 
 
 
 
 
 
Common stock
 
 
Treasury stock

 
 
Retained earnings

 
 
(000)
 
Shares  

 
Amount

 
 
 
 
 
Total

Balance at February 2, 2019
 
368,242

 
$
3,682

 
$
1,375,965

 
$
(372,663
)
 
$

 
$
2,298,762

 
$
3,305,746

Net earnings
 

 

 

 

 

 
421,142

 
421,142

Cumulative effect of adoption of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
accounting standard
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(leases), net
 

 

 

 

 

 
(19,614
)
 
(19,614
)
Common stock issued under stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
plans, net of shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
used for tax withholding
 
390

 
4

 
5,291

 
(50,880
)
 

 

 
(45,585
)
Stock-based compensation
 

 

 
19,689

 

 

 

 
19,689

Common stock repurchased
 
(3,372
)
 
(33
)
 
(9,387
)
 

 

 
(310,710
)
 
(320,130
)
Dividends declared ($0.255 per share)
 

 

 

 

 

 
(93,722
)
 
(93,722
)
Balance at May 4, 2019
 
365,260

 
$
3,653

 
$
1,391,558

 
$
(423,543
)
 
$

 
$
2,295,858

 
$
3,267,526






 
 
 
 
 
 
Additional paid-in capital

 
 
 
Accumulated
other comprehensive income (loss)

 
 
 
 
 
 
Common stock
 
 
Treasury stock

 
 
Retained earnings

 
 
(000)
 
Shares  

 
Amount

 
 
 
 
 
Total

Balance at February 3, 2018
 
379,618

 
$
3,796

 
$
1,292,364

 
$
(318,279
)
 
$
27

 
$
2,071,400

 
$
3,049,308

Net earnings
 

 

 

 

 

 
418,252

 
418,252

Cumulative effect of adoption of
 
 
 
 
 
 
 
 
 
 
 
 
 
 
accounting standard
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(revenue recognition), net
 

 

 

 

 

 
19,884

 
19,884

Unrealized investment loss, net

 

 

 

 

 
(20
)
 

 
(20
)
Common stock issued under stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
plans, net of shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
used for tax withholding
 
732

 
8

 
4,674

 
(44,798
)
 

 

 
(40,116
)
Stock-based compensation
 

 

 
23,760

 

 

 

 
23,760

Common stock repurchased
 
(3,271
)
 
(33
)
 
(8,093
)
 

 

 
(247,244
)
 
(255,370
)
Dividends declared ($0.225 per share)
 

 

 

 

 

 
(85,410
)
 
(85,410
)
Balance at May 5, 2018
 
377,079

 
$
3,771

 
$
1,312,705

 
$
(363,077
)
 
$
7

 
$
2,176,882

 
$
3,130,288

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 


6



Condensed Consolidated Statements of Cash Flows
 
Three Months Ended
($000, unaudited)
May 4, 2019

 
May 5, 2018

Cash Flows From Operating Activities
 
 
 
Net earnings
$
421,142

 
$
418,252

Adjustments to reconcile net earnings to net cash provided
by operating activities:
 
 
 
Depreciation and amortization
82,757

 
79,797

Stock-based compensation
19,689

 
23,760

Deferred income taxes
16,543

 
16,842

Change in assets and liabilities:
 
 
 
Merchandise inventory
(63,331
)
 
(253,721
)
Other current assets
(41,777
)
 
(46,028
)
Accounts payable
122,654

 
238,677

Other current liabilities
(108,208
)
 
(95,966
)
Income taxes
56,206

 
90,322

Operating lease assets and liabilities, net
2,855

 

Other long-term, net
457

 
115

Net cash provided by operating activities
508,987

 
472,050

 
 
 
 
Cash Flows From Investing Activities
 
 
 
Additions to property and equipment
(95,629
)
 
(79,793
)
Proceeds from investments
517

 
505

Net cash used in investing activities
(95,112
)
 
(79,288
)
 
 
 
 
Cash Flows From Financing Activities
 
 
 
Issuance of common stock related to stock plans
5,295

 
4,682

Treasury stock purchased
(50,880
)
 
(44,798
)
Repurchase of common stock
(320,130
)
 
(255,370
)
Dividends paid
(93,722
)
 
(85,410
)
Net cash used in financing activities
(459,437
)
 
(380,896
)
 
 
 
 
Net (decrease) increase in cash, cash equivalents, and restricted cash and cash equivalents
(45,562
)
 
11,866

 
 
 
 
Cash, cash equivalents, and restricted cash and cash equivalents:
 
 
 
Beginning of period
1,478,079

 
1,353,272

End of period
$
1,432,517

 
$
1,365,138

 
 
 
 
Supplemental Cash Flow Disclosures
 
 
 
Interest paid
$
4,219

 
$
4,219

Income taxes paid
$
48,468

 
$
17,058

The accompanying notes are an integral part of these condensed consolidated financial statements.




7



Notes to Condensed Consolidated Financial Statements

Three Months Ended May 4, 2019 and May 5, 2018
(Unaudited)

Note A: Summary of Significant Accounting Policies

Basis of presentation. The accompanying unaudited interim condensed consolidated financial statements have been prepared from the records of Ross Stores, Inc. and subsidiaries (the “Company”) without audit and, in the opinion of management, include all adjustments (consisting of only normal, recurring adjustments) necessary to present fairly the Company’s financial position as of May 4, 2019 and May 5, 2018, the results of operations, comprehensive income, stockholders' equity, and cash flows for the three month periods ended May 4, 2019 and May 5, 2018. The Condensed Consolidated Balance Sheet as of February 2, 2019, presented herein, has been derived from the Company’s audited consolidated financial statements for the fiscal year then ended.

Certain information and disclosures normally included in the notes to annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted for purposes of these 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, contained in the Company’s Annual Report on Form 10-K for the year ended February 2, 2019.

The results of operations, comprehensive income, stockholders' equity, and cash flows for the three month periods ended May 4, 2019 and May 5, 2018 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

Recently adopted accounting standards. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Accounting Standards Codification "ASC" 842), which along with subsequent amendments, supersedes the lease accounting requirements in ASC 840, Leases. The updated guidance requires balance sheet recognition for all leases with lease terms greater than one year including a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

The Company adopted ASC 842 as of February 3, 2019 (the "effective date"), using the optional transition method on a modified retrospective basis. The Company did not elect the transitional package of practical expedients or the use of hindsight upon adoption of the ASC. The Company elected the practical expedient to not record a lease liability and corresponding right-of-use asset for leases with terms of 12 months or less, and to account for lease and non-lease components as a single lease component. Upon adoption, the Company recorded lease liabilities based on the present value of the remaining minimum rental payments, using discount rates as of the effective date, of $2.9 billion, and the corresponding right-of-use assets of $2.9 billion. The Company also recorded a cumulative-effect adjustment to decrease beginning retained earnings of $19.6 million, primarily related to the write-off of previously capitalized initial direct costs that are no longer capitalized under ASC 842, partially offset by the write-off of the deferred gain on a previous sale-leaseback transaction that meets the sale definition under ASC 842. Reporting periods beginning on or after February 3, 2019 are presented under ASC 842, while prior period amounts and disclosures were not adjusted and continue to be reported under ASC 840. ASC 842 did not have a significant impact to the Company’s condensed consolidated statements of earnings or to the condensed consolidated statements of cash flows.

Significant accounting policies. Except for the updates to accounting policies for leases as a result of adopting ASC 842 described below, there have been no significant changes to the accounting policies followed by the Company as described in Note A to the audited consolidated financial statements for the fiscal year ended February 2, 2019.


8



Leases. As the Company’s leases generally do not provide an implicit discount rate, the Company uses the estimated collateralized incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments for use in the calculation of the lease liabilities and right-of-use assets. This rate is determined using a portfolio approach based on the risk-adjusted rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar lease term. Operating lease liabilities and corresponding right-of-use assets include options to extend lease terms that are reasonably certain of being exercised. The Company does not record a lease liability and corresponding right-of-use asset for leases with terms of 12 months or less, and accounts for lease and non-lease components as a single lease component. The Company's lease portfolio is comprised of operating leases with the lease cost recorded on a straight-line basis over the lease term.

Prior to the adoption of ASC 842, when a lease contained “rent holidays” or required fixed escalations of the minimum lease payments, the Company recorded rental expense on a straight-line basis over the term of the lease and the difference between the average rental amount was charged to expense and the amount payable under the lease was recorded as deferred rent. The Company began recording rent expense on the lease possession date. Tenant improvement allowances were amortized over the lease term. Changes in deferred rent and tenant improvement allowances were included as a component of operating activities in the Condensed Consolidated Statements of Cash Flows.

Revenue recognition. The following sales mix table disaggregates revenue by merchandise category for the three month periods ended May 4, 2019 and May 5, 2018:

 
Three Months Ended
 
May 4, 2019

 
May 5, 2018

Ladies
27
%
 
28
%
Home Accents and Bed and Bath
25
%
 
25
%
Shoes
14
%
 
14
%
Accessories, Lingerie, Fine Jewelry, and Fragrances
13
%
 
13
%
Men's
13
%
 
12
%
Children's
8
%
 
8
%
Total
100
%
 
100
%

Cash, restricted cash, and restricted investments. Restricted cash, cash equivalents, and investments serve as collateral for certain insurance obligations of the Company. These restricted funds are invested in bank deposits, money market mutual funds, U.S. Government and agency securities, and corporate securities and cannot be withdrawn from the Company’s account without the prior written consent of the secured parties. The classification between current and long-term is based on the timing of expected payments of the insurance obligations.

The following table provides a reconciliation of cash, cash equivalents, restricted cash and equivalents in the Condensed Consolidated Balance Sheets that reconcile to the amounts shown on the Condensed Consolidated Statements of Cash Flows:
($000)
May 4, 2019

 
February 2, 2019

 
May 5, 2018

Cash and cash equivalents
$
1,366,592

 
$
1,412,912

 
$
1,302,836

Restricted cash and cash equivalents included in:
 
 
 
 
 
  Prepaid expenses and other
11,867

 
11,402

 
8,900

  Other long-term assets
54,058

 
53,765

 
53,402

Total restricted cash and cash equivalents
65,925

 
65,167

 
62,302

Total cash, cash equivalents and restricted cash and equivalents
$
1,432,517

 
$
1,478,079

 
$
1,365,138


9



In addition to the restricted cash and equivalents in the table above, the Company had restricted investments included in the Condensed Consolidated Balance Sheets as shown below:

($000)
May 4, 2019

 
February 2, 2019

 
May 5, 2018

Prepaid expenses and other
$

 
$
400

 
$
2,822

Total restricted investments
$

 
$
400

 
$
2,822


Property and equipment. As of May 4, 2019 and May 5, 2018, the Company had $14.8 million and $11.1 million, respectively, of property and equipment purchased but not yet paid. These purchases are included in Property and Equipment, Accounts payable, and Accrued expenses and other in the accompanying Condensed Consolidated Balance Sheets.

Cash dividends. Dividends included in the Condensed Consolidated Statements of Cash Flows reflect cash dividends paid during the periods shown. Dividends per share reported on the Condensed Consolidated Statements of Earnings reflect cash dividends declared during the periods shown.

The Company’s Board of Directors declared a cash dividend of $0.255 per common share in March 2019, and $0.225 per common share in March, May, August, and November 2018, respectively.

In May 2019, the Company’s Board of Directors declared a cash dividend of $0.255 per common share, payable on June 28, 2019.

Litigation, claims, and assessments. Like many retailers, the Company has been named in class action lawsuits, primarily in California, alleging violation of wage and hour/employment laws and consumer protection laws. Class action litigation remains pending as of May 4, 2019.

The Company is also party to various other legal and regulatory proceedings arising in the normal course of business. Actions filed against the Company may include commercial, product and product safety, consumer, intellectual property, environmental, and labor and employment-related claims, including lawsuits in which private plaintiffs or governmental agencies allege that the Company violated federal, state, and/or local laws. Actions against the Company are in various procedural stages. Many of these proceedings raise factual and legal issues and are subject to uncertainties.

In the opinion of management, the resolution of pending class action litigation and other currently pending legal and regulatory proceedings will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

Recently issued accounting standards. The Company considers the applicability and impact of all ASUs issued by the FASB. For the three month period ended May 4, 2019, the FASB issued ASUs were assessed and determined to be either not applicable or are expected to have minimal impact on the Company's condensed consolidated financial results.

Reclassifications. Certain items related to income taxes in the prior year’s condensed consolidated statements of cash flows have been reclassified to conform to the current years’ presentation.






10



Note B: Fair Value Measurements

The carrying value of cash and cash equivalents, short- and long-term investments, restricted cash and cash equivalents, restricted investments, accounts receivable, other long-term assets, accounts payable, and other long-term liabilities approximates their estimated fair value.

Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The inputs used to measure fair value include: Level 1, observable inputs such as quoted prices in active markets; Level 2, inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, unobservable inputs in which little or no market data exists. This fair value hierarchy requires the Company to develop its own assumptions and maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Corporate, U.S. government and agency, and mortgage-backed securities are classified within Level 1 or Level 2 because these securities are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

There were no transfers between Level 1 and Level 2 categories during the three month period ended May 4, 2019. The fair value of the Company’s financial instruments are as follows:

($000)
 
May 4, 2019

 
February 2, 2019

 
May 5, 2018

Cash and cash equivalents (Level 1)
 
$
1,366,592

 
$
1,412,912

 
$
1,302,836

 
 
 
 
 
 
 
Restricted cash and cash equivalents (Level 1)
 
$
65,925

 
$
65,167

 
$
62,302

 
 
 
 
 
 
 
Investments (Level 2)
 
$
8

 
$
125

 
$
709

 
 
 
 
 
 
 
Restricted investments (Level 2)
 
$

 
$
400

 
$
2,822


The underlying assets in the Company’s non-qualified deferred compensation program as of May 4, 2019, February 2, 2019, and May 5, 2018 (included in Other long-term assets and in Other long-term liabilities) primarily consist of participant-directed money market, stable value, stock, and bond funds. The fair value measurement for funds with quoted market prices in active markets (Level 1) and for funds without quoted market prices in active markets (Level 2) are as follows:

($000)
May 4, 2019

 
February 2, 2019

 
May 5, 2018

Level 1
$
127,785

 
$
114,181

 
$
112,073

Level 2
10,626

 
10,377

 
16,339

Total
$
138,411

 
$
124,558

 
$
128,412



Note C: Stock-Based Compensation

Stock-based compensation. For the three month periods ended May 4, 2019 and May 5, 2018, the Company recognized stock-based compensation expense as follows:

 
Three Months Ended
($000)
May 4, 2019

 
May 5, 2018

Restricted stock
$
9,449

 
$
11,508

Performance awards
9,304

 
11,424

Employee stock purchase plan
936

 
828

Total
$
19,689

 
$
23,760



11



Total stock-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Earnings for the three month periods ended May 4, 2019 and May 5, 2018, is as follows:

 
Three Months Ended
Statements of Earnings Classification ($000)
May 4, 2019

 
May 5, 2018

Cost of goods sold
$
13,122

 
$
11,036

Selling, general and administrative
6,567

 
12,724

Total
$
19,689

 
$
23,760


The tax benefits related to stock-based compensation expense for the three month periods ended May 4, 2019 and May 5, 2018 were $3.7 million and $4.9 million, respectively.

Restricted stock awards. The Company grants shares of restricted stock to directors, officers, and key employees. The market value of shares of restricted stock at the date of grant is amortized to expense over the vesting period of generally three to five years.

During the three month periods ended May 4, 2019 and May 5, 2018, shares purchased by the Company for tax withholding totaled 555,997 and 583,228, respectively, and are considered treasury shares which are available for reissuance.

Performance share awards. The Company has a performance share award program for senior executives. A performance share award represents a right to receive shares of restricted stock on a specified settlement date based on the Company’s attainment of a profitability-based performance goal during the performance period, which is the Company’s fiscal year. If attained, the restricted stock then vests over a service period, generally two to three years from the date the performance award was granted.
 
As of May 4, 2019, shares related to unvested restricted stock and performance share awards totaled 4.4 million shares. A summary of restricted stock and performance share award activity for the three month period ended May 4, 2019, is presented below:

(000, except per share data)
Number of
shares

 
Weighted
average
grant date
fair value

Unvested at February 2, 2019
5,130

 
$
62.50

Awarded
975

 
90.78

Released
(1,429
)
 
51.12

Forfeited
(285
)
 
69.97

Unvested at May 4, 2019
4,391

 
$
72.00


The unamortized compensation expense at May 4, 2019, was $178.7 million, which is expected to be recognized over a weighted-average remaining period of 2.5 years. The unamortized compensation expense at May 5, 2018, was $162.5 million, which was expected to be recognized over a weighted-average remaining period of 2.2 years.

Employee stock purchase plan. Under the Employee Stock Purchase Plan (“ESPP”), eligible employees participating in the quarterly offering period can choose to have up to the lesser of 10% of their annual base earnings or the IRS annual share purchase limit of $25,000 in aggregate market value to purchase the Company’s common stock. The purchase price of the stock is 85% of the closing market price on the date of purchase. Purchases occur on a quarterly basis (on the last trading day of each calendar quarter). The Company recognizes expense for ESPP purchase rights equal to the value of the 15% discount given on the purchase date.



12



Note D: Earnings Per Share

The Company computes and reports both basic earnings per share ("EPS") and diluted EPS. Basic EPS is computed by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net earnings by the sum of the weighted average number of common shares and dilutive common stock equivalents outstanding during the period. Diluted EPS reflects the total potential dilution that could occur from outstanding equity plan awards, including unexercised stock options, and unvested shares of both performance and non-performance based awards of restricted stock.

For the three month period ended May 4, 2019, approximately 700 weighted average shares were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive for the period presented. For the three month period ended May 5, 2018, approximately 19,300 weighted average shares were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive for the period presented.

The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations:

 
Three Months Ended
Shares in (000s)
Basic EPS

 
Effect of
dilutive
common stock
equivalents

 
Diluted
EPS

May 4, 2019
 
 
 
 
 
Shares
363,085

 
2,827

 
365,912

Amount
$
1.16

 
$
(0.01
)
 
$
1.15

 
 
 
 
 
 
May 5, 2018
 
 
 
 
 
     Shares
373,797

 
3,265

 
377,062

     Amount
$
1.12

 
$
(0.01
)
 
$
1.11




13



Note E: Leases
The Company currently leases all but two of its store locations with original, non-cancelable terms that in general range from three to ten years. Store leases typically contain provisions for three to four renewal options of five years each. The exercise of lease renewal options is at the sole discretion of the Company. Most store leases also provide for minimum annual rentals and for payment of variable lease costs. In addition, some store leases also have provisions for additional rent based on a percentage of sales (“percentage rent”) and others include rental payments adjusted periodically for inflation. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company does not have any financing leases.
The Company leases five warehouses, and has four third-party warehousing arrangements. All of these contain renewal provisions. The following table summarizes the location and expiration date of the Company’s leased warehouses:
Location
 
Lease Expiration Date
Leased Warehouses
 
 
Carlisle, Pennsylvania
 
2020
Carlisle, Pennsylvania
 
2021
Fort Mill, South Carolina
 
2024
Rock Hill, South Carolina
 
2028
Shafter, California
 
2029
 
 
 
Third-Party Warehouses
 
 
Fort Mill, South Carolina
 
2020
Moreno Valley, California
 
2023
Moreno Valley, California
 
2029
Shafter, California
 
2020

The Company leases approximately 103,000 and 5,000 square feet of office space for its Los Angeles and Boston buying offices, respectively. The lease term for these facilities expire in 2022 and 2020, respectively, and contain renewal provisions. In addition, the Company has a ground lease related to its New York buying office.

The following table presents operating lease costs included in the Condensed Consolidated Statement of Earnings for the three months ended May 4, 2019:

 
 
Three Months Ended
($000)
 
May 4, 2019
Operating lease cost 1
 
$
155,566

Variable lease costs 2
 
42,914

Net lease cost 3
 
$
198,480

 
 
 
1 Net of sublease income which was immaterial.

 
 
2 Includes property and rent taxes, insurance, common area maintenance, and percentage rent.

 
 
3 Excludes short-term lease costs which were immaterial.

 
 


14



The maturity of operating lease liabilities, including the ground lease related to the New York buying office as of May 4, 2019, are as follows:

($000)
 
Operating Leases 1

2020
 
$
581,014

2021
 
604,295

2022
 
523,113

2023
 
443,164

2024
 
349,525

Thereafter
 
1,633,681

Total lease payments
 
4,134,792

Less: interest
 
1,083,362

Present value of lease liabilities
 
$
3,051,430

Less: current operating lease liabilities
 
536,900

Non-current operating lease liabilities
 
$
2,514,530

 
 
 
1  Operating lease payments exclude $258.4 million of minimum lease payments for leases signed that have not yet commenced.


At May 4, 2019, the weighted-average remaining lease term and the weighted average discount rate for operating leases is 10.9 years and 3.6%, respectively. The weighted-average remaining lease term and the weighted average discount rate, excluding the long-term ground lease related to the New York buying office, were 6.1 years and 3.3%, respectively.
Cash paid for amounts included in the measurement of operating lease liabilities was $148.2 million for the three months ended May 4, 2019 and is included in Net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows.

Operating lease assets obtained in exchange for new operating lease liabilities (includes new leases and remeasurements or modifications of existing leases) during the three months ended May 4, 2019 was $207.8 million.
In accordance with ASC 840, the aggregate undiscounted future minimum annual lease payments under leases, including the ground lease related to the New York buying office, in effect at February 2, 2019 were as follows:
($000)
 
Total operating leases
2019
 
$
555,812

2020
 
580,712

2021
 
499,678

2022
 
424,695

2023
 
339,340

Thereafter
 
1,575,673

Total minimum lease payments
 
$
3,975,910





15



Note F: Debt

Senior notes. Unsecured senior debt, net of unamortized discounts and debt issuance costs, consisted of the following:

($000)
 
May 4, 2019

 
February 2, 2019

 
May 5, 2018

6.38% Series A Senior Notes due 2018
 
$

 
$

 
$
84,981

6.53% Series B Senior Notes due 2021
 
64,947

 
64,942

 
64,927

3.375% Senior Notes due 2024
 
247,605

 
247,498

 
247,178

Total long-term debt
 
$
312,552

 
$
312,440

 
$
397,086

Less: current portion
 

 

 
84,981

Total due beyond one year
 
$
312,552

 
$
312,440


$
312,105



As of May 4, 2019, the Company had outstanding unsecured 3.375% Senior Notes due September 2024 (the “2024 Notes”) with an aggregate principal amount of $250 million. Interest on the 2024 Notes is payable semi-annually.

As of May 4, 2019, the Company also had outstanding Series B unsecured Senior Notes in the aggregate principal amount of $65 million held by various institutional investors. The Series B notes are due in December 2021, and bear interest at 6.53%. Borrowings under these Senior Notes are subject to certain financial covenants, including interest coverage and other financial ratios. As of May 4, 2019, the Company was in compliance with these covenants.

On December 13, 2018, the Company repaid at maturity the $85 million principal amount of the Series A 6.38% unsecured Senior Notes.

As of May 4, 2019, February 2, 2019, and May 5, 2018, total unamortized discount and debt issuance costs were $2.4 million, $2.6 million, and $2.9 million, respectively, and were classified as a reduction of Long-term debt.

The 2024 Notes, and the Series B Senior Notes are subject to prepayment penalties for early payment of principal.

The aggregate fair value of the two outstanding series of Senior Notes was approximately $318 million and $316 million, as of May 4, 2019 and February 2, 2019, respectively, compared to $407 million for the then three outstanding series of Senior Notes as of May 5, 2018. The fair value is estimated by obtaining comparable market quotes which are considered to be Level 1 inputs under the fair value measurements and disclosures guidance.

The table below shows the components of interest expense and income for the three month periods ended May 4, 2019 and May 5, 2018:

 
Three Months Ended
($000)
May 4, 2019

 
May 5, 2018

Interest expense on long-term debt
$
3,283

 
$
4,645

Other interest expense
313

 
302

Capitalized interest
(765
)
 
(498
)
Interest income
(8,466
)
 
(4,952
)
Interest income, net
$
(5,635
)
 
$
(503
)

16



Revolving credit facility. The Company’s $600 million unsecured revolving credit facility expires in April 2021, and contains a $300 million sublimit for issuance of standby letters of credit (subject to increase in proportion to any increase in the size of the credit facility). The facility also contains an option allowing the Company to increase the size of its credit facility by up to an additional $200 million, with the agreement of the lenders. Interest on any borrowings under this facility is based on LIBOR plus an applicable margin (currently 100 basis points) and is payable quarterly and upon maturity. As of May 4, 2019, the Company had no borrowings or standby letters of credit outstanding under this facility and the $600 million credit facility remains in place and available.
 
The revolving credit facility is subject to a financial leverage ratio covenant. As of May 4, 2019, the Company was in compliance with this covenant.

Note G: Taxes on Earnings

As of May 4, 2019, February 2, 2019, and May 5, 2018, the reserves for unrecognized tax benefits were $83.5 million, $78.8 million, and $125.6 million, inclusive of $13.7 million, $13.0 million, and $24.0 million of related interest and penalties, respectively. In November 2018, the Company resolved uncertain tax positions related to fiscal 2015 with the Internal Revenue Service. As a result, the Company recognized a decrease in reserves for tax positions in prior periods of $52.4 million, inclusive of $12.6 million of related reserves for interest and penalties. The Company accounts for interest and penalties related to unrecognized tax benefits as a part of its provision for taxes on earnings. If recognized, $66.7 million would impact the Company’s effective tax rate. The difference between the total amount of unrecognized tax benefits and the amounts that would impact the effective tax rate relates to amounts attributable to deferred income tax assets and liabilities. These amounts are net of federal and state income taxes.

It is reasonably possible that certain state tax matters may be concluded or statutes of limitations may lapse during the next 12 months. Accordingly, the total amount of unrecognized tax benefits may decrease by up to $9.3 million.

The Company is open to audit by the Internal Revenue Service under the statute of limitations for fiscal years 2015 through 2018. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years 2014 through 2018. Certain state tax returns are currently under audit by various tax authorities. The Company does not expect the results of these audits to have a material impact on the consolidated financial statements.

17



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Ross Stores, Inc.:

Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheets of Ross Stores, Inc. and subsidiaries (the “Company”) as of May 4, 2019 and May 5, 2018, the related condensed consolidated statements of earnings, comprehensive income, stockholders' equity, and cash flows for the three month periods ended May 4, 2019 and May 5, 2018, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of February 2, 2019, and the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated April 2, 2019, 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 2, 2019 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, 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.


/s/ Deloitte & Touche LLP

San Francisco, California
June 12, 2019

18



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. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed below under the caption "Forward-Looking Statements" and in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for 2018. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for 2018. All information is based on our fiscal calendar.

Overview

Ross Stores, Inc. operates two brands of off-price retail apparel and home fashion stores -- Ross Dress for Less® (“Ross”) and dd’s DISCOUNTS®. Ross is the largest off-price apparel and home fashion chain in the United States with 1,502 locations in 38 states, the District of Columbia and Guam as of May 4, 2019. Ross offers first-quality, in-season, name brand and designer apparel, accessories, footwear, and home fashions for the entire family at savings of 20% to 60% off department and specialty store regular prices every day. We also operate 243 dd’s DISCOUNTS stores in 18 states that feature a more moderately-priced assortment of first-quality, in-season, name brand apparel, accessories, footwear, and home fashions for the entire family at savings of 20% to 70% off moderate department and discount store regular prices every day.

Results of Operations

The following table summarizes the financial results for the three month periods ended May 4, 2019 and May 5, 2018:

 
Three Months Ended
 
May 4, 2019

 
May 5, 2018

Sales
 
 
 
Sales (millions)
$
3,797

 
$
3,589

Sales growth
5.8
%
 
8.5
%
Comparable store sales growth
2
%
 
3
%
 
 
 
 
Costs and expenses (as a percent of sales)
 
 
 
Cost of goods sold
71.2
%
 
70.3
%
Selling, general and administrative
14.7
%
 
14.6
%
Interest income, net
(0.2
%)
 
(0.0
%)
 
 
 
 
Earnings before taxes (as a percent of sales)
14.3
%
 
15.1
%

 
 
 
Net earnings (as a percent of sales)
11.1
%
 
11.7
%



19




Stores. Our expansion strategy is to open additional stores based on market penetration, local demographic characteristics, competition, expected store profitability, and the ability to leverage overhead expenses. We continually evaluate opportunistic real estate acquisitions and opportunities for potential new store locations. We also evaluate our current store locations and determine store closures based on similar criteria.

 
Three Months Ended
Store Count
May 4, 2019

 
May 5, 2018

Beginning of the period
1,717

 
1,622

Opened in the period
28

 
29

Closed in the period

 

End of the period
1,745

 
1,651


Sales. Sales for the three month period ended May 4, 2019, increased $208 million, or 5.8%, compared to the three month period ended May 5, 2018, due to the opening of 94 net new stores between May 5, 2018 and May 4, 2019, and a 2% increase in “comparable” store sales (defined as stores that have been open for more than 14 complete months).

Our sales mix for the three month periods ended May 4, 2019 and May 5, 2018 is shown below:

 
Three Months Ended
 
May 4, 2019

 
May 5, 2018

Ladies
27
%
 
28
%
Home Accents and Bed and Bath
25
%
 
25
%
Shoes
14
%
 
14
%
Accessories, Lingerie, Fine Jewelry, and Fragrances
13
%
 
13
%
Men's
13
%
 
12
%
Children's
8
%
 
8
%
Total
100
%
 
100
%

We intend to address the competitive climate for off-price apparel and home goods by pursuing and refining our existing strategies and by continuing to strengthen our organization, diversify our merchandise mix, and more fully develop our systems to improve regional and local merchandise offerings. Although our strategies and store expansion program contributed to sales gains for the three month period ended May 4, 2019, we cannot be sure that they will result in a continuation of sales growth or in an increase in net earnings.

Cost of goods sold. Cost of goods sold for the three month period ended May 4, 2019, increased $179 million compared to the same period in the prior year, mainly due to increased sales from the opening of 94 net new stores and a 2% increase in comparable store sales.

Cost of goods sold as a percentage of sales for the three month period ended May 4, 2019, increased approximately 85 basis points from the same period in the prior year, primarily due to a 60 basis point increase in distribution expenses mainly due to favorable timing of packaway-related expenses in the prior year, a 35 basis point increase in freight costs, and buying and occupancy costs that were higher by 10 basis points each. These increases were partially offset by a 30 basis point improvement in merchandise margin.

We cannot be sure that the gross profit margins realized for the three month period ended May 4, 2019, will continue in the future.

Selling, general and administrative expenses. For the three month period ended May 4, 2019, selling, general and administrative expenses ("SG&A") increased $34 million compared to the same period in the prior year, mainly due to increased store operating costs reflecting the opening of 94 net new stores between May 5, 2018 and May 4, 2019.


20



Selling, general and administrative expenses as a percentage of sales for the three month period ended May 4, 2019, increased approximately 10 basis points from the same period in the prior year primarily due to higher wages partially offset by favorable timing of expenses.

Interest income, net. Interest income, net for the three month period ended May 4, 2019, increased compared to the same period in the prior year primarily due to an increase in interest income due to higher interest rates. Interest income, net for the three month periods ended May 4, 2019 and May 5, 2018, consists of the following:

 
Three Months Ended
($000)
May 4, 2019

 
May 5, 2018

Interest expense on long-term debt
$
3,283

 
$
4,645

Other interest expense
313

 
302

Capitalized interest
(765
)
 
(498
)
Interest income
(8,466
)
 
(4,952
)
Interest income, net
$
(5,635
)
 
$
(503
)

Taxes on earnings. Our effective tax rates for the three month periods ended May 4, 2019 and May 5, 2018, were approximately 22% and 23%, respectively. The effective tax rate represents the applicable combined federal and state statutory rates reduced by the federal benefit of state taxes deductible on federal returns. The effective tax rate is impacted by changes in tax law and accounting guidance, location of new stores, level of earnings, tax effects associated with share-based compensation, and the resolution of tax positions with various taxing authorities. We anticipate that our effective tax rate for fiscal 2019 will be between 23% and 24%.

Net earnings. Net earnings as a percentage of sales for the three month period ended May 4, 2019, was lower compared to the same period in the prior year primarily due to higher cost of goods sold and higher SG&A expenses, partially offset by higher interest income.

Earnings per share. Diluted earnings per share for the three month period ended May 4, 2019 was $1.15 compared to $1.11, for the three month period ended May 5, 2018. The 4% increase in diluted earnings per share for the three month period ended May 4, 2019, was attributable to a 1% increase in net earnings, and 3% from the reduction in weighted average diluted shares outstanding, largely due to stock repurchases under our stock repurchase program.

Financial Condition

Liquidity and Capital Resources

Our primary sources of funds for our business activities are cash flows from operations and short-term trade credit. Our primary ongoing cash requirements are for merchandise inventory purchases, payroll, operating and variable lease costs, taxes, and capital expenditures in connection with new and existing stores, and investments in distribution centers, information systems, and buying and corporate offices. We also use cash to repurchase stock under our stock repurchase program and to pay dividends, and we may use cash for the repayment of debt as it becomes due.

 
Three Months Ended
($000)
May 4, 2019

 
May 5, 2018

Cash provided by operating activities
$
508,987

 
$
472,050

Cash used in investing activities
(95,112
)
 
(79,288
)
Cash used in financing activities
(459,437
)
 
(380,896
)
Net (decrease) increase in cash, cash equivalents, and restricted cash and cash equivalents
$
(45,562
)
 
$
11,866


21





Operating Activities

Net cash provided by operating activities was $509.0 million and $472.1 million for the three month periods ended May 4, 2019 and May 5, 2018, respectively, and was primarily driven by net earnings excluding non-cash expenses for depreciation and amortization. Our primary source of operating cash flow is the sale of our merchandise inventory. We regularly review the age and condition of our merchandise and are able to maintain current merchandise inventory in our stores through replenishment processes and liquidation of slower-moving merchandise through clearance markdowns.

The increase in cash flow from operating activities for the three month period ended May 4, 2019, compared to the same period in the prior year was primarily driven by the timing of merchandise receipts and related payments versus last year, partially offset by higher income tax payments. The timing of merchandise receipts and related payments versus last year resulted in higher accounts payable leverage (defined as accounts payable divided by merchandise inventory) which was 71%, 67%, and 69% as of May 4, 2019, February 2, 2019, and May 5, 2018, respectively.

As a regular part of our business, packaway inventory levels will vary over time based on availability of compelling opportunities in the marketplace. Packaway merchandise is purchased with the intent that it will be stored in our warehouses until a later date. The timing of the release of packaway inventory to our stores is principally driven by the product mix and seasonality of the merchandise, and its relation to our store merchandise assortment plans. As such, the aging of packaway varies by merchandise category and seasonality of purchase, but typically packaway remains in storage less than six months. We expect to continue to take advantage of packaway inventory opportunities to maximize our ability to deliver bargains to our customers.

Changes in packaway inventory levels impact our operating cash flow. As of May 4, 2019, packaway inventory was 44% of total inventory compared to 46% at the end of fiscal 2018. As of May 5, 2018, packaway inventory was 49% of total inventory compared to 49% at the end of fiscal 2017.

Investing Activities

Net cash used in investing activities was $95.1 million and $79.3 million for the three month periods ended May 4, 2019 and May 5, 2018, respectively. The increase in cash used for investing activities for the three month period ended May 4, 2019 compared to the three month period ended May 5, 2018 was primarily due to an increase in our capital expenditures.

Our capital expenditures were $95.6 million and $79.8 million for the three month periods ended May 4, 2019 and May 5, 2018, respectively. Our capital expenditures include costs to build, expand, and improve distribution centers; open new stores and improve existing stores; and for various other expenditures related to our information technology systems, buying and corporate offices.

We are forecasting approximately $600 million in capital expenditures for fiscal year 2019 to fund costs for fixtures and leasehold improvements to open new Ross and dd’s DISCOUNTS stores, the upgrade or relocation of existing stores, investments in information technology systems, initial investment in our next distribution center, and for various other expenditures related to our stores, distribution centers, buying and corporate offices. We expect to fund capital expenditures with available cash and cash equivalents, and cash flow from operations.

Financing Activities

Net cash used in financing activities was $459.4 million and $380.9 million for the three month periods ended May 4, 2019 and May 5, 2018, respectively. For the three month periods ended May 4, 2019 and May 5, 2018, our liquidity and capital requirements were provided by available cash and cash equivalents, and cash flows from operations. The increase in cash used for financing activities for the three month period ended May 4, 2019, compared to the three month period ended May 5, 2018, was primarily due to an increase in the repurchase of our common stock under our stock repurchase program and higher cash dividends.

We repurchased 3.4 million and 3.3 million shares of common stock for aggregate purchase prices of approximately $320.1 million and $255.4 million during the three month periods ended May 4, 2019 and May 5, 2018, respectively. We also acquired 0.6 million and 0.6 million shares of treasury stock under our employee stock equity compensation programs, for aggregate purchase prices of approximately $50.9 million and $44.8 million during the three month periods ended May 4, 2019 and May 5, 2018, respectively. In March 2019, our Board of Directors approved a new, two-year $2.55 billion stock repurchase program through fiscal 2020.

22




For the three month periods ended May 4, 2019 and May 5, 2018, we paid cash dividends of $93.7 million and $85.4 million, respectively.

Short-term trade credit represents a significant source of financing for merchandise inventory. Trade credit arises from customary payment terms and trade practices with our vendors. We regularly review the adequacy of credit available to us from all sources and expect to be able to maintain adequate trade credit, bank lines, and other credit sources to meet our capital and liquidity requirements, including lease payment obligations, in 2019.

We have a $600 million unsecured revolving credit facility which expires in April 2021, and contains a $300 million sublimit for issuance of standby letters of credit (subject to increase in proportion to any increase in the size of the credit facility). The facility also contains an option allowing us to increase the size of our credit facility by up to an additional $200 million, with the agreement of the lenders. Interest on any borrowings under this facility is based on LIBOR plus an applicable margin (currently 100 basis points) and is payable quarterly and upon maturity. As of May 4, 2019, we had no borrowings or standby letters of credit outstanding under this facility and the $600 million credit facility remains in place and available.

The revolving credit facility is subject to a financial leverage ratio covenant. As of May 4, 2019, we were in compliance with this covenant.

We estimate that existing cash and cash equivalent balances, cash flows from operations, bank credit lines, and trade credit are adequate to meet our operating cash needs and to fund our planned capital investments, repayment of debt, common stock repurchases, and quarterly dividend payments for at least the next twelve months.

Contractual Obligations and Off-Balance Sheet Arrangements

The table below presents our significant contractual obligations as of May 4, 2019:

($000)
Less than
one year

 
1 - 3
years

 
3 - 5
years

 
After 5
years

 
Total¹

 
 
 
 
Recorded contractual obligations:
 
 
 
 
 
 
 
 
 
   Senior notes
$

 
$
65,000

 
$

 
$
250,000

 
$
315,000

   Operating leases
575,132

 
1,114,573

 
778,623

 
680,837

 
3,149,165

   New York buying office ground lease2
5,882

 
12,835

 
14,066

 
952,844

 
985,627

Unrecorded contractual obligations:
 
 
 
 
 
 
 
 
 
   Real estate obligations3
12,687

 
48,012

 
48,618

 
149,107

 
258,424

   Interest payment obligations
12,682

 
25,364

 
16,875

 
4,219

 
59,140

   Purchase obligations4
2,743,045

 
19,714

 
5,203

 
388

 
2,768,350

Total contractual obligations
$
3,349,428

 
$
1,285,498

 
$
863,385

 
$
2,037,395

 
$
7,535,706


1 We have a $82.5 million liability for unrecognized tax benefits that is included in Other long-term liabilities on our interim Condensed Consolidated Balance Sheet. This liability is excluded from the schedule above as the timing of payments cannot be reasonably estimated except for the item disclosed in Note G.

² Our New York buying office building is subject to a 99-year ground lease.

3 Minimum lease payments for leases signed that have not yet commenced.

4 Purchase obligations primarily consist of merchandise inventory purchase orders, commitments related to construction projects, store fixtures and supplies, and information technology services, transportation, and maintenance contracts.

Other than the unrecorded contractual obligations noted above, we do not have any material off-balance sheet arrangements as of May 4, 2019.


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Senior notes. As of May 4, 2019, we had outstanding unsecured 3.375% Senior Notes due September 2024 with an aggregate principal amount of $250 million. Interest on the 2024 Notes is payable semi-annually.

As of May 4, 2019, we also had outstanding Series B unsecured senior notes in the aggregate principal amount of $65 million, held by various institutional investors. The Series B notes are due in December 2021 and bear interest at 6.53%. Borrowings under these Senior Notes are subject to certain financial covenants, including interest coverage and other financial ratios. As of May 4, 2019, we were in compliance with these covenants.

The 2024 Notes, and Series B senior notes are subject to prepayment penalties for early payment of principal.

Standby letters of credit and collateral trust. We use standby letters of credit outside of our revolving credit facility in addition to a funded trust to collateralize our insurance obligations. As of May 4, 2019, February 2, 2019, and May 5, 2018, we had $5.5 million, $7.3 million, and $7.8 million, respectively, in standby letters of credit outstanding and $58.6 million, $58.3 million and $57.3 million, respectively, in a collateral trust. The standby letters of credit are collateralized by restricted cash and the collateral trust consists of restricted cash, cash equivalents, and investments.

Trade letters of credit. We had $12.1 million, $13.3 million, and $17.6 million in trade letters of credit outstanding at May 4, 2019, February 2, 2019, and May 5, 2018, respectively.

Dividends. In May 2019, our Board of Directors declared a cash dividend of $0.255 per common share, payable on June 28, 2019.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts. These estimates and assumptions are evaluated on an ongoing basis and are based on historical experience and on various other factors that management believes to be reasonable. Actual results may differ significantly from these estimates. During the first quarter of fiscal 2019, other than changes to our lease accounting policies as a result of adoption of Accounting Standards Update ("ASU") No. 2016-02, Leases (Accounting Standards Codification "ASC" 842) described below, there have been no significant changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year ended February 2, 2019.

As our leases generally do not provide an implicit discount rate, we use the estimated collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments for use in the calculation of the lease liabilities and right-of-use assets. This rate is determined using a portfolio approach based on the risk-adjusted rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar lease term. Operating lease liabilities and corresponding right-of-use assets include options to extend lease terms that are reasonably certain of being exercised. We do not record a lease liability and corresponding right-of-use asset for leases with terms of 12 months or less, and account for lease and non-lease components as a single lease component. Our lease portfolio is comprised of operating leases with the lease cost recorded on a straight-line basis over the lease term.

Prior to the adoption of ASC 842, when a lease contained “rent holidays” or required fixed escalations of the minimum lease payments, we recorded rental expense on a straight-line basis over the term of the lease and the difference between the average rental amount was charged to expense and the amount payable under the lease was recorded as deferred rent. We began recording rent expense on the lease possession date. Tenant improvement allowances were amortized over the lease term. Changes in deferred rent and tenant improvement allowances were included as a component of operating activities in the Condensed Consolidated Statements of Cash Flows.

See Note A - Summary of Significant Accounting Policies (Recently Adopted Accounting Standards) and Note E - Leases in the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the adoption of ASC 842.


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Forward-Looking Statements

This report may contain a number of forward-looking statements regarding planned store growth, new markets, expected sales, projected earnings levels, capital expenditures, and other matters. These forward-looking statements reflect our then-current beliefs, projections, and estimates with respect to future events and our projected financial performance, operations, and competitive position. The words “plan,” “expect,” “target,” “anticipate,” “estimate,” “believe,” “forecast,” “projected,” “guidance,” "outlook," “looking ahead” and similar expressions identify forward-looking statements.

Future economic and industry trends that could potentially impact revenue, profitability, and growth are difficult to predict. Our forward-looking statements are subject to risks and uncertainties which could cause our actual results to differ materially from those forward-looking statements and our previous expectations and projections. Such risks are not limited to but may include:

Competitive pressures in the apparel and home-related merchandise retailing industry, which are high.
Unexpected changes in the level of consumer spending on or preferences for apparel and home-related merchandise, which could adversely affect us.
Unseasonable weather that may affect shopping patterns and consumer demand for seasonal apparel and other merchandise.
Impacts from the macro-economic environment, financial and credit markets, and geopolitical conditions that affect consumer confidence and consumer disposable income.
Our need to effectively manage our inventories, markdowns, and inventory shortage in order to achieve our planned gross margins.
Our dependence on the market availability, quantity, and quality of attractive brand name merchandise at desirable discounts, and on the ability of our buyers to purchase merchandise to enable us to offer customers a wide assortment of merchandise at competitive prices.
Information or data security breaches, including cyber-attacks on our transaction processing and computer information systems, which could result in theft or unauthorized disclosure of customer, credit card, employee, or other private and valuable information that we handle in the ordinary course of our business.
Disruptions in our supply chain or in our information systems that could impact our ability to process sales and to deliver product to our stores in a timely and cost-effective manner.
Our need to obtain acceptable new store sites with favorable consumer demographics to achieve our planned growth.
Our need to expand in existing markets and enter new geographic markets in order to achieve growth.
Consumer problems or legal issues involving the quality, safety, or authenticity of products we sell, which could harm our reputation, result in lost sales, and/or increase our costs.
An adverse outcome in various legal, regulatory, or tax matters that could increase our costs.
Damage to our corporate reputation or brands that could adversely affect our sales and operating results.
Our need to continually attract, train, and retain associates with the retail talent necessary to execute our off-price retail strategies.
Our need to effectively advertise and market our business.
Risks associated with selling and importing merchandise produced in other countries.
Changes in U.S. tax, tariff, or trade policy regarding apparel and home-related merchandise produced in other countries, which could adversely affect our business.
Possible volatility in our revenues and earnings.
A natural or man-made disaster in California or in another region where we have a concentration of stores, offices, or a distribution center that could harm our business.
Our need to maintain sufficient liquidity to support our continuing operations, our new store and distribution center growth plans, and our stock repurchase program and quarterly dividends.

The factors underlying our forecasts are dynamic and subject to change. As a result, any forecasts or forward-looking statements speak only as of the date they are given and do not necessarily reflect our outlook at any other point in time. We disclaim any obligation to update or revise these forward-looking statements.




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks, which primarily include changes in interest rates. We do not engage in financial transactions for trading or speculative purposes.

We may occasionally use forward contracts to hedge against fluctuations in foreign currency prices. We had no outstanding forward contracts as of May 4, 2019.

Interest that is payable on our revolving credit facility is based on variable interest rates and is, therefore, affected by changes in market interest rates. As of May 4, 2019, we had no borrowings outstanding under our revolving credit facility.

As of May 4, 2019, we have one outstanding series of unsecured 6.53% Series B Senior Notes due December 2021 with an aggregate principal amount of $65 million. We also have unsecured 3.375% Senior Notes due September 2024 with an aggregate principal amount of $250 million. Interest that is payable on our Senior Notes is based on fixed interest rates, and is therefore unaffected by changes in market interest rates.

Interest is receivable on our short- and long-term investments. Changes in interest rates may impact interest income recognized in the future, or the fair value of our investment portfolio.

A hypothetical 100 basis point increase or decrease in prevailing market interest rates would not have a material impact on our consolidated financial position, results of operations, cash flows, or the fair values of our short- and long-term investments as of and for the three month period ended May 4, 2019. We do not consider the potential losses in future earnings and cash flows from reasonably possible, near-term changes in interest rates to be material.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at that reasonable assurance level as of the end of the period covered by this report.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.

Quarterly Evaluation of Changes in Internal Control Over Financial Reporting

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any change occurred during the first fiscal quarter of 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our management concluded that there was no such change during the 2019 first fiscal quarter.

26



PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The matters under the caption “Litigation, claims, and assessments” in Note A of Notes to Condensed Consolidated Financial Statements are incorporated herein by reference.

ITEM 1A. RISK FACTORS

See Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 2, 2019 for a description of the risks and uncertainties associated with our business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Information regarding shares of common stock we repurchased during the first quarter of fiscal 2019 is as follows:
 
Total number of shares
(or units) purchased1

 
Average price
paid per share
(or unit)

 
Total number of
shares
(or units)
purchased as
part of publicly
announced
plans or
programs

 
Maximum number
(or approximate
dollar value) of
shares (or units)
that may yet be
purchased under
the plans or
programs ($000)2

Period
 
 
 
February
 
 
 
 
 
 
 
(2/03/2019 - 3/02/2019)

 

 

 

March
 
 
 
 
 
 
 
(3/03/2019 - 4/06/2019)
2,339,266

 
$91.92
 
1,783,572

 
$2,385,831
April
 
 
 
 
 
 
 
(4/07/2019 - 5/04/2019)
1,589,344

 
$98.15
 
1,589,041

 
$2,229,870
Total
3,928,610

 
$94.44
 
3,372,613

 
$2,229,870

1 We acquired 555,997 shares of treasury stock during the quarter ended May 4, 2019. Treasury stock includes shares acquired from employees for tax withholding purposes related to vesting of restricted stock grants. All remaining shares were repurchased under our publicly announced stock repurchase program.

2 In March 2019, our Board of Directors approved a two-year $2.55 billion stock repurchase program through fiscal 2020.

27



ITEM 6. EXHIBITS
Exhibit
 
Number
Exhibit
3.1
 
 
3.2
 
 
10.1
 
 
10.2
 
 
10.3
 
 
15
 
 
31.1
 
 
31.2
 
 
32.1
 
 
32.2
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
ROSS STORES, INC.
 
 
(Registrant)
 
 
 
 
 
 
 
 
Date:
June 12, 2019
By: 
/s/Michael J. Hartshorn
 
 
 
Michael J. Hartshorn
 
 
 
Group Executive Vice President, Finance and Legal, Chief Financial Officer, and Principal Accounting Officer

29