economic risks and rewards. FIN No. 46(R) explains how to identify variable interest entities and how an enterprise should assess its interest in an entity to decide whether to consolidate that entity.
The Company was not required under FIN No. 46(R) to consolidate its $87.3 million synthetic lease facility for its South Carolina distribution center and its $70 million synthetic lease facility for its Southern California distribution center because the lessors/owners of these distribution centers are not variable interest entities.
The table below presents significant commercial credit facilities available to the Company as of May 1, 2004:
Trade Letters of Credit. The Company had $12.9 million and $12.7 million in trade letters of credit outstanding at May 1, 2004 and May 3, 2003, respectively.
Dividends. In May 2004, a quarterly cash dividend payment of $.0425 per common share was declared by the Company’s Board of Directors, payable on or about July 1, 2004. In May 2003, the Board of Directors declared quarterly cash dividends of $.0288 per common share.
Stock Repurchase Program. In January 2004, the Company announced that the Board of Directors authorized a new stock repurchase program of up to $350 million for 2004 and 2005. During the three months ended May 1, 2004, the Company repurchased approximately 2 million shares for an aggregate purchase price of approximately $59 million.
The Company estimates that cash flows from operations, existing bank credit lines and trade credit are adequate to meet operating cash needs, fund the planned capital investments, repurchase common stock and make quarterly dividend payments for at least the next twelve months.
New Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity Status.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. The adoption of SFAS No. 150 had no impact on the Company’s operating results or financial position.
Relocation of West Coast Distribution Center and Corporate Headquarters
In September 2003, the Company opened its new 1.3 million square foot distribution center in Perris, California. During the third and fourth quarters of 2003, the Company transitioned its West Coast distribution operations from its Newark, California facility to the new Perris, California facility. The Company continues to use the office space attached to the Newark facility as its corporate headquarters and plans to relocate its corporate headquarters to Pleasanton, California in July 2004.
The Company is currently evaluating ongoing uses for or the potential sale of its Newark, California headquarters and distribution center once the facility is fully vacated following the planned corporate office relocation. The Company is in the process of looking at alternative uses for the facility and obtaining independent, third-party valuations of the Newark facility. The Company expects to complete this evaluation process in the first half of 2004. The commercial real estate market in the San Francisco Bay Area is currently depressed. Depending on the Company’s decision as to future use or disposition of the Newark facility, a significant write-down to adjust the facility’s net book value, which is approximately $35 million, to its current fair market value may be required.
dd’s DISCOUNTSSM
During 2003, the Company announced the development of dd’s DISCOUNTSSM, a new off-price concept targeted to serve the needs of lower-income households, which it believes to be one of the fastest growing demographic markets in the country. This new business will generally have similar merchandise departments and categories to that of Ross, but will feature a different mix of brands, consisting mostly of moderate and discount store labels at lower average price points. The Company plans to open ten initial dd’s DISCOUNTSSM locations on the West Coast during
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the second half of 2004. The dd’s DISCOUNTSSM store prototype is planned to be about 25,000 gross square feet located in established strip shopping centers in densely populated urban and suburban neighborhoods. The dd’s DISCOUNTSSM and Ross merchant and store organizations will be separate and distinct; however, dd’s DISCOUNTSSM will share certain corporate and support services with Ross.
Critical Accounting Policies
The preparation of the Company’s consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts. The estimates and assumptions are evaluated on an on-going basis and are based on historical experience and on various other factors that management believes to be reasonable. The Company believes the following critical accounting policies describe the more significant judgments and estimates used in the preparation of its consolidated financial statements:
Inventory. The Company’s merchandise inventory is stated at the lower of cost or market with cost determined on a weighted average cost method. The Company purchases manufacturer overruns and canceled orders both during and at the end of a season which are referred to as “packaway” inventory. Packaway inventory is purchased with the intent that it will be stored in the Company’s warehouses until a later date, which may even be the beginning of the same selling season in the following year. Included in the carrying value of the Company’s inventory is a provision for shrinkage. The shrinkage reserve is based on historical shrinkage rates as evaluated through the Company’s physical inventory counts and cycle counts. If actual market conditions are less favorable than those projected by management, or if sales of the inventory are more difficult than anticipated, additional inventory write-downs may be required.
Long-lived Assets. The Company records a long-lived asset impairment charge when events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable based on estimated future cash flows. An impairment loss would be recognized if analysis of the undiscounted cash flow of an asset group was less than the carrying value of the asset group. In the course of performing this analysis, management determined that no long-lived asset impairment charge was required for the three months ended May 1, 2004 and May 3, 2003. Should actual results differ materially from projected results, an impairment charge may be required in the future.
Self-Insurance. The Company self insures certain of its workers’ compensation and general liability risks as well as certain of its health insurance plans. The Company’s self-insurance liability is determined actuarially, based on claims filed and an estimate of claims incurred but not reported. Should a greater amount of claims occur compared to what is estimated or the costs of medical care and state statutory requirements increase beyond what was anticipated, reserves recorded may not be sufficient and additional charges could be required.
The above listing is not intended to be a comprehensive list of all of the Company’s accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by Generally Accepted Accounting Principles, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.
Forward-Looking Statements and Factors Affecting Future Performance
This report includes certain forward-looking statements, which reflect the Company’s current beliefs, projections and estimates with respect to future events and the Company’s future financial performance, operations and competitive position. The words “expect,” “anticipate,” “estimate,”
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“believe,” “looking ahead,” “forecast,” “plan,” “projected,” and similar expressions identify forward-looking statements.
In particular, this report contains forward-looking statements regarding planned new store growth, the time needed to remedy difficulties with the new core merchandising systems and the duration and financial impact of resulting in-store inventory imbalances, all of which are subject to risks and uncertainties that could cause the Company’s actual results to differ materially from historical results or current expectations. The Company is continuing to assess the implementation of new information systems, and cannot be certain that all problems have currently been discovered or that their scope is understood.
Risks and uncertainties that apply to both Ross and dd’s DISCOUNTSSM stores include, without limitation, the Company’s ability to successfully and quickly implement, integrate and correct difficulties in its new core merchandising system and various other new supply chain and merchandising systems, including generation of all necessary information in a timely and cost effective manner, interruptions in the Company’s ability to operate its distribution network, due to weather, power outages or systems difficulties, the Company’s ability to continue to purchase attractive brand-name merchandise at desirable discounts, the anticipated relaxation of trade restrictions with China in January 2005, which may affect the Company’s buying strategies and price points, the Company’s ability to obtain acceptable new store locations, the Company’s ability to identify and successfully enter new geographic markets, and the Company’s ability to attract and retain personnel with the retail talent necessary to execute its strategies.
The Company’s corporate headquarters, certain of its distribution centers and 31% of its stores are located in California. Therefore, a downturn in the California economy or a major California natural disaster could significantly affect the Company’s operating results and financial condition.
The Company is evaluating whether it will incur a potential non-cash, non-recurring charge to write down the value of the Company’s Newark headquarters and distribution center to current fair market value.
In addition, the Company is subject to a number of risks and uncertainties that are common to companies in the retail apparel and home-related merchandise markets, including competitive pressures in the apparel industry, changes in the level of consumer spending on or preferences for apparel or home-related merchandise, changes in geopolitical conditions and deterioration or uncertainty regarding general economic conditions, unseasonable weather trends.
The Company’s continued success depends, in part, upon its ability to increase sales at existing locations, and to open new stores and to operate stores on a profitable basis. There can be no assurance that the Company’s existing strategies and store expansion program will result in a continuation of revenue and profit growth.
Future economic and industry trends that could potentially impact revenue and profitability remain difficult to predict. The factors underlying the Company’s forecasts are dynamic and subject to change. As a result, any forecasts speak only as of the date they are given and do not necessarily reflect the Company’s outlook at any other point in time. The Company disclaims any obligation to update or revise these forward-looking statements.
Other risk factors are detailed in the Company’s Form 10-K for fiscal 2003.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which primarily include changes in interest rates. The Company does not engage in financial transactions for trading or speculative purposes.
Interest that is payable on the Company’s credit facilities and long-term debt is based on variable interest rates and is, therefore, affected by changes in market interest rates. In addition, lease payments under the Company’s synthetic lease agreements are determined based on variable interest rates and are, therefore, affected by changes in market interest rates.
A hypothetical 100 basis point increase in prevailing market interest rates would not have materially impacted its consolidated financial position, results of operations, or cash flows for the three months ended May 1, 2004. The Company does not consider the potential losses in future earnings and cash flows from reasonably possible near term changes in interest rates to be material. The Company does not currently use derivative financial instruments in its investment portfolio.
ITEM 4. CONTROLS AND PROCEDURES
The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any change occurred during the first fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, the Company’s management determined that the implementation of a new Core Merchandising System constituted a material change of a component in the Company’s internal control over financial reporting. The Company’s management has determined that the internal controls and procedures related to the financial reporting of inventory under the new Core Merchandising System are effective 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.
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PART II – OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Information regarding shares of common stock repurchased by the Company during the first quarter of 2004 is as follows :
Period | | Total
Number of
Shares (or
Units)
Purchased (1) | | 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) | |
| |
| |
| |
| |
| |
February (2/1/2004-2/28/2004) | | | 380,500 | | | $ 30.95 | | | 380,500 | | | $ 338,000 | |
March (2/29/2004-4/3/2004) | | | 1,224,537 | | | $ 29.37 | | | 1,094,956 | | | $ 306,000 | |
April (4/4/2004-5/1/2004) | | | 485,123 | | | $ 30.92 | | | 485,123 | | | $ 291,000 | |
Total | | | 2,090,160 | | | $ 30.02 | | | 1,960,579 | | | $ 291,000 | |
(1) The Company repurchased 129,581 shares through May 1, 2004 related to required income tax withholdings for restricted stock. All remaining shares were repurchased under the $350 million stock repurchase program publicly announced on February 5, 2004, which expires February 4, 2006.
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 within this Report. |
| |
(b) | Reports on Form 8-K |
| |
| During the period that is the subject of this quarterly report, the Company furnished current reports on Form 8-K, to reference and include as exhibits press releases issued to the public by the Company, on the following dates: |
| |
| 1. February 5, 2004 – reporting under Item 12. |
| 2. March 16, 2004 – reporting under Item 12. |
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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 by the undersigned thereunto duly authorized.
| ROSS STORES, INC. |
| Registrant |
| |
Date: June 8, 2004 | /s/J. CALL |
|
|
| John G. Call |
| Senior Vice President, Chief Financial Officer, |
| Principal Accounting Officer and Corporate Secretary |
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INDEX TO EXHIBITS
Exhibit
Number | | Exhibit |
| |
|
3.1 | | Amendment of Certificate of Incorporation dated June 5, 2002 and Corrected First Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Form 10-Q filed by Ross Stores for its quarter ended May 4, 2002. |
| | |
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. |
| | |
15 | | Letter re: Unaudited Interim Financial Information. |
| | |
31.1 | | Certification of Chief Executive Officer Pursuant to Sarbanes-Oxley Act Section 302(a). |
| | |
31.2 | | Certification of Chief Financial Officer Pursuant to Sarbanes-Oxley Act Section 302(a). |
| | |
32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. |
| | |
32.2 | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
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