The table below presents significant contractual payment obligations of the Company as of April 30, 2005.
The Company has lease arrangements for certain equipment in its stores for its point-of-sale (“POS”) hardware and software systems. These leases are accounted for as operating leases for financial reporting purposes. The initial terms of these leases are two years and the Company typically has options to renew the leases for two to three one-year periods. Alternatively, the Company may purchase or return the equipment at the end of the initial or each renewal term. The Company has guaranteed the value of the equipment at the end of the respective initial lease terms of $11.1 million, which is included in “Other synthetic lease obligations” in the table above.
In January 2004, the Company commenced its lease on its corporate headquarters in Pleasanton, California. The lease has an initial term of 10.5 years with three five-year renewal options.
Other Financings. The Company leases a 1.3 million square foot distribution center in Fort Mill, South Carolina. This distribution center, including equipment and systems, is being financed under an $87.3 million, five-year operating lease, commonly referred to as a synthetic lease, which expires in May 2006. Monthly rent expense is currently payable at 90 basis points over 30-day LIBOR on the lease balance of $87.3 million. The Company has estimated rent expense on the lease which is calculated based upon prevailing interest rates (30-day LIBOR plus 90 basis points) and is included in “Synthetic leases” in the contractual obligations table above. At the end of the lease term, the Company must refinance the $87.3 million synthetic lease facility, purchase the distribution center at the amount of the then-outstanding lease balance, or arrange a sale of the distribution center to a third party. The Company has agreed under a residual value guarantee to pay the lessor up to 85% of the lease balance. The Company’s obligation under this residual value guarantee of $74.2 million is included in “Other synthetic lease obligations” in the contractual obligations table above.
The Company also leases a 1.3 million square foot distribution center in Perris, California. This distribution center is being financed under a $70 million ten-year synthetic lease facility that expires in July 2013. Rent expense on this center is payable monthly at a fixed annual rate of 5.8% on the lease balance of $70 million. At the end of the lease term, the Company must refinance the $70 million synthetic lease facility, purchase the distribution center at the amount of the then-outstanding lease balance, or arrange a sale of the distribution center to a third party. If the distribution center is sold to a third party for less than $70 million, the Company has agreed under a residual value guarantee to pay the lessor the shortfall below $70 million not to exceed $56 million. The Company’s contractual obligation of $56 million is included in “Other synthetic lease obligations” in the above table. The equipment and systems for the Southern California center were financed with a $50 million, five-year senior unsecured term debt facility, which is included in “Long-term debt” in the table above.
In accordance with Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” the Company has recognized a liability and corresponding asset for the fair value of the residual value guarantee in the amount of $8.3 million for the Southern California distribution center and $1.5 million for the POS lease. These residual value guarantees are being amortized on a straight-line basis over the original terms of the leases. The current portion of the related asset and liability is recorded in “Prepaid expenses and other” and “Accrued expenses and other,” respectively, and the long-term portion of the related assets and liabilities is recorded in “Other long-term assets” and “Other long-term liabilities,” respectively, in the accompanying condensed consolidated balance sheets.
In addition, the Company leases two separate warehouse facilities for packaway storage in Carlisle, Pennsylvania with operating leases expiring through 2011. In January 2004, the Company entered into a two-year lease with two one-year options for a warehouse facility in Fort Mill, South Carolina. These three leased facilities are being used primarily to store packaway merchandise.
The synthetic lease facilities described above, as well as the Company’s long-term debt and revolving credit facility, have covenant restrictions requiring the Company to maintain certain interest coverage and leverage ratios. In addition, the interest rates under these agreements may vary depending on the Company’s actual interest coverage ratios. As of April 30, 2005, the Company was in compliance with these covenants.
In December 2003, the FASB issued the revised FIN No. 46(R), “Consolidation of Variable Interest Entities,” which addresses consolidation by business enterprises of entities that are not controllable through voting interests or in which the equity investors do not bear the residual 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 synthetic leases since the lessors/owners are not variable interest entities.
Purchase Obligations. As of April 30, 2005, the Company had purchase obligations of $838.1 million. These purchase obligations primarily consist of merchandise inventory purchase orders, commitments related to store fixtures, supplies, and information technology service and maintenance contracts. Total merchandise inventory purchase orders of $740.0 million are all purchase obligations of less than one year as of April 30, 2005.
16
Commercial Credit Facilities
The table below presents significant commercial credit facilities available to the Company as of April 30, 2005:
| | Amount of Commitment Expiration Per Period | | Total
Amount
Committed | |
| |
| | |
($000) | | Less than
1 Year | | 1 - 3
Years | | 4 - 5
Years | | After 5
Years | | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Commercial Credit Commitments | | | | | | | | | | | | | | | | |
Revolving credit facility1 | | $ | — | | $ | — | | $ | 600,000 | | $ | — | | $ | 600,000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total commercial commitments | | $ | — | | $ | — | | $ | 600,000 | | $ | — | | $ | 600,000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
1 Contains a $200 million sublimit for issuances of letters of credit, of which $64.0 million is outstanding and $136.0 million is available as of April 30, 2005. |
Revolving Credit Facility. During 2004, the Company entered into a $600 million revolving credit facility with its banks, which contains a $200 million sublimit for issuances of letters of credit of which $136.0 million was available at April 30, 2005. Interest is LIBOR-based plus an applicable margin (currently 75 basis points) and is payable upon borrowing maturity but no less than quarterly. Borrowing under this credit facility is subject to the Company maintaining certain interest coverage and leverage ratios. As of April 30, 2005, the Company had no borrowings outstanding under this facility. This existing revolving credit facility is scheduled to expire in March 2009.
Standby Letters of Credit. The Company uses standby letters of credit to collateralize certain obligations related to its self-insured workers’ compensation and general liability claims. The Company had $64.0 million and $65.2 million in standby letters of credit outstanding at April 30, 2005 and May 1, 2004, respectively.
Trade Letters of Credit. The Company had $15.5 million and $12.9 million in trade letters of credit outstanding at April 30, 2005 and May 1, 2004, respectively.
Dividends. In May 2005, a quarterly cash dividend payment of $.05 per common share was declared by the Company’s Board of Directors, payable on or about July 1, 2005. In May 2004, the Board of Directors declared quarterly cash dividends of $.0425 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 April 30, 2005, the Company repurchased approximately 1.5 million shares for an aggregate purchase price of approximately $42.6 million.
The Company estimates that cash flows from operations, existing bank credit lines and trade credit are adequate to meet operating cash needs, fund its planned capital investments, repurchase common stock and make quarterly dividend payments for at least the next twelve months.
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. 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. The Company believes the following critical accounting policies describe the more significant judgments and estimates used in the preparation of its consolidated financial statements:
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Merchandise 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 merchandise inventory is a provision for shrinkage. The shrinkage reserve is based on historical shrinkage rates as evaluated through the Company’s physical merchandise inventory counts and cycle counts. If actual market conditions are less favorable than those projected by management, or if sales of the merchandise inventory are more difficult than anticipated, additional merchandise 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 April 30, 2005 and May 1, 2004. 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.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued the revised Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123(R) requires recognition of stock-based compensation expense in the consolidated financial statements over the period during which an employee is required to provide service in exchange for the award. SFAS No. 123(R) is effective for the fiscal year beginning after June 15, 2005. The Company will implement the requirements of the standard as of the beginning of its fiscal year 2006. The impact of adopting SFAS No. 123(R) will be dependent on numerous factors including, but not limited to, the valuation model chosen by the Company to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period; and the transition method chosen for adopting SFAS No. 123(R). The Company has not yet quantified the effects of the adoption of SFAS No. 123(R).
dd’s DISCOUNTSSM
The Company operates ten dd’s DISCOUNTSSM stores, 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. The Company opened these initial stores at locations in California during the second half of 2004. This new business generally has similar merchandise departments and categories to those of Ross, but features a different mix of brands, consisting mostly of moderate department store and discount store labels at lower average price points. The average dd’s DISCOUNTSSM store is approximately 26,000 gross square feet and is located in an established strip shopping center in densely populated urban and suburban neighborhoods. The dd’s DISCOUNTSSM and Ross merchant, store and distribution organizations are separate and distinct; however, dd’s DISCOUNTSSM shares other certain corporate and support services with Ross.
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Moreno Valley Warehouse Acquisition
On May 20, 2005, the Company acquired a warehouse property in Moreno Valley, California for $38.3 million consisting of land and building. The Company funded the acquisition with its existing cash balances.
Forward-Looking Statements and Factors Affecting Future Performance
This report includes certain forward-looking statements regarding planned new store growth, forecasted capital expenditures, and expected sales and earnings levels, 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,” “believe,” “looking ahead,” “forecast,” “guidance,” “plan,” “projected,” and similar expressions identify forward-looking statements.
Risks and uncertainties that apply to both Ross and dd’s DISCOUNTSSM stores include, without limitation, the Company’s ability to effectively operate and integrate various new supply chain and core merchandising systems, including generation of all necessary information in a timely and cost effective manner; migrating the Company’s data center from Newark, California to Pleasanton, California in the first half of 2005 without unexpected delays or interruption in system availability; achieving and maintaining targeted levels of productivity and efficiency in its distribution centers; obtaining acceptable new store locations; 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 and general economic conditions; unseasonable weather trends; disruptions in supply chain; lower than planned gross margin and greater than planned operating costs; the Company’s ability to continue to purchase attractive brand-name merchandise at desirable discounts, 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 29% 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’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 growth or 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 2004.
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 revolving 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 certain of the Company’s synthetic lease agreements are determined based on variable interest rates and are, therefore, affected by changes in market interest rates. As of April 30, 2005, the Company had no borrowings outstanding under its revolving credit facilities and had $50 million of long-term debt outstanding which accrues interest at LIBOR plus 150 basis points.
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A hypothetical 100 basis point increase in prevailing market interest rates would not have materially impacted the Company’s consolidated financial position, results of operations, or cash flows as of and for the three-month period ended April 30, 2005. 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 occasionally uses forward contracts to hedge against fluctuations in foreign currency prices. The Company had no outstanding forward contracts at April 30, 2005.
ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Management, with the participation of the 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 quarterly period covered by this report. Based on that evaluation, the 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.
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
Management, with the participation of the 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 of 2005 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting. Based on that evaluation, management has concluded that there was no such change during the first fiscal quarter.
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PART II – OTHER INFORMATION
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Information regarding shares of common stock repurchased by the Company during the first quarter of 2005 is as follows:
Period | | 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) | |
| |
|
| |
|
| |
|
| |
|
| |
February | | | | | | | | | | | | | |
(1/30/2005-2/26/2005) | | | 583,268 | | $ | 27.85 | | | 492,098 | | $ | 161,000 | |
March | | | | | | | | | | | | | |
(2/27/2005-4/2/2005) | | | 597,200 | | $ | 28.80 | | | 482,600 | | $ | 147,000 | |
April | | | | | | | | | | | | | |
(4/3/2005-4/30/2005) | | | 542,170 | | $ | 27.71 | | | 541,280 | | $ | 132,000 | |
| |
|
| | | | |
|
| | | | |
Total | | | 1,722,638 | | $ | 28.14 | | | 1,515,978 | | $ | 132,000 | |
| |
|
| | | | |
|
| | | | |
|
1 The Company acquired 206,660 shares for the quarter ended April 30, 2005 related to income tax withholdings for restricted stock. All remaining shares were repurchased under the two-year $350 million stock repurchase program publicly announced on February 5, 2004. |
Incorporated herein by reference to the list of Exhibits contained in the Exhibit Index within this Report.
21
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 9, 2005 | By: | /s/J. Call |
| | John G. Call |
| | Senior Vice President, Chief Financial Officer, |
| | Principal Accounting Officer and Corporate Secretary |
22
INDEX TO EXHIBITS
Exhibit
Number | | Exhibit |
| |
|
3.1 | | Amendment of Certificate of Incorporation dated May 21, 2004 and 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 July 31, 2004. |
| | |
3.2 | | Amended By-laws, dated August 25, 1994, incorporated by reference to Exhibit 3.2 to the Form 10-Q filed by Ross Stores for its quarter ended July 30, 1994. |
| | |
10.1 | | Fifth Amendment to the Independent Contractor Consultancy Agreement effective February 1, 2005 between Norman A. Ferber and Ross Stores, Inc. incorporated by reference to Exhibit 10.20 to the Form 10-K filed by Ross Stores for its year ended January 29, 2005. |
| | |
10.2 | | Second Amendment to the Independent Contractor Consultancy Agreement between Ross Stores, Inc. and Stuart G. Moldaw effective April 1, 2005 incorporated by reference to Exhibit 10.38 to the Form 10-K filed by Ross Stores for its year ended January 29, 2005. |
| | |
15 | | Letter re: Unaudited Interim Financial Information from Deloitte & Touche dated June 8, 2005. |
| | |
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. |
23
