Included in the carrying value of our merchandise inventory is a provision for shortage. The shortage reserve is based on historical shortage rates as evaluated through our periodic physical merchandise inventory counts and cycle counts. If actual market conditions, markdowns, or shortage are less favorable than those projected by us, or if sales of the merchandise inventory are more difficult than anticipated, additional merchandise inventory write-downs may be required.
SFAS No. 123(R) requires companies to estimate future expected forfeitures at the date of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and to recognize stock-based compensation expense. All stock-based compensation awards are expensed over the service or performance periods of the awards.
The critical accounting policies noted above are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by Generally Accepted Accounting Principles (“GAAP”), with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting one alternative accounting principle over another would not produce a materially different result.
Effects of inflation or deflation.We do not consider the effects of inflation or deflation to be material to our financial position and results of operations.
New Accounting Pronouncements
SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands required disclosures about fair value measurements. The adoption of SFAS 157 as of February 3, 2008 did not materially impact our operating results or financial position.
SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”) is effective for fiscal years beginning after November 15, 2007. SFAS 159 establishes a fair value option under which entities can elect to report certain financial assets and liabilities at fair value, with changes in fair value recognized in earnings. The adoption of SFAS 159 as of February 3, 2008 did not materially impact our operating results or financial position.
Forward-Looking Statements
This report may contain a number of forward-looking statements regarding, without limitation, 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, growth, operations and competitive position. The words “plan,” “expect,” “anticipate,” “estimate,” “believe,” “forecast,” “projected,” “guidance,” “looking ahead” and similar expressions identify forward-looking statements.
Future economic and industry trends that could potentially impact revenue, profitability, and growth remain difficult to predict. As a result, our forward-looking statements are subject to risks and uncertainties which could cause our actual results to differ materially from these forward-looking statements and our expectations and projections. Refer to Part II, Item 1A in this quarterly report on Form 10-Q for a more complete discussion of risk factors. 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.
Other risk factors are detailed in our filings with the Securities and Exchange Commission including, without limitation, our annual report on Form 10-K for 2007.
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 occasionally use forward contracts to hedge against fluctuations in foreign currency prices. We had no outstanding forward contracts as of August 2, 2008.
Interest that is payable on our revolving credit facilities is based on variable interest rates and is, therefore, affected by changes in market interest rates. In addition, lease payments under certain of our synthetic lease agreements are determined based on variable interest rates and are, therefore affected by changes in market interest rates. As of August 2, 2008, we had no borrowings outstanding under our revolving credit facilities.
In addition, we issued notes to institutional investors in two series: Series A for $85.0 million accrues interest at 6.38% and Series B for $65.0 million accrues interest at 6.53%. The amount outstanding under these notes as of August 2, 2008 is $150.0 million.
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Interest is receivable on our short and long-term investments. Changes in interest rates may impact the fair value of the Company’s investment portfolio.
A hypothetical 100 basis point increase or decrease in prevailing market interest rates would not have materially impacted our consolidated financial position, results of operations, cash flows, or the fair values of the Company’s short and long-term investments as of and for the three and six-month periods ended August 2, 2008. 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. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our 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
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 second fiscal quarter of 2008 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 quarter.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The matters under the caption “Provision for litigation costs and other legal proceedings” in Note A of Notes to Condensed Consolidated Financial Statements are incorporated herein by reference.
Item 1A. Risk Factors
Our quarterly report on Form 10-Q for our second fiscal quarter of 2008, and information we provide in our press releases, telephonic reports and other investor communications, including those on our website, may contain a number of forward-looking statements with respect to anticipated future events and our projected financial performance, operations and competitive position that are subject to risks and uncertainties that could cause our actual results to differ materially from those forward-looking statements and our prior expectations and projections. Refer to Management’s Discussion and Analysis for a more complete identification and discussion of “Forward-Looking Statements.”
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Our financial condition, results of operations, cash flows and the performance of our common stock may be adversely affected by a number of risk factors. Risks and uncertainties that apply to both Ross and dd’s DISCOUNTS include, without limitation, the following:
We are subject to the economic and industry risks that affect large retailers operating in the United States.
Our business is exposed to the risks of a large, multi-store retailer, which must continually and efficiently obtain and distribute a supply of fresh merchandise throughout a large and growing network of stores. These risk factors include:
An increase in the level of competitive pressures in the retail apparel or home-related merchandise industry.
Potential changes in the level of consumer spending on or preferences for apparel or home-related merchandise, including the potential impact from uncertainty in mortgage credit markets and higher gas and commodity prices.
Potential changes in geopolitical and/or general economic conditions that could affect the availability of product and/or the level of consumer spending.
Unseasonable weather trends that could affect consumer demand for seasonal apparel and apparel-related products.
A change in the availability, quantity or quality of attractive brand-name merchandise at desirable discounts that could impact our ability to purchase product and continue to offer customers a wide assortment of merchandise at competitive prices.
Potential disruptions in the supply chain that could impact our ability to deliver product to our stores in a timely and cost-effective manner.
A change in the availability, quality or cost of new store real estate locations.
A downturn in the economy or a natural disaster in California or in another region where we have a concentration of stores or a distribution center. Our corporate headquarters, two distribution centers and 26% of our stores are located in California.
Higher than planned freight costs from higher-than-expected fuel surcharges.
We are subject to operating risks as we attempt to execute on our merchandising and growth strategies.
The continued success of our business depends, in part, upon our ability to increase sales at our existing store locations, and to open new stores and to operate stores on a profitable basis. Our existing strategies and store expansion programs may not result in a continuation of our anticipated revenue or profit growth. In executing our off-price retail strategies and working to improve efficiencies, expand our store network, and reduce our costs, we face a number of operational risks, including:
Our ability to attract and retain personnel with the retail talent necessary to execute our strategies.
Our ability to effectively operate our various supply chain, core merchandising and other information systems.
Our ability to improve our merchandising capabilities through the development and implementation of new processes and systems enhancements.
Our ability to improve new store sales and profitability, especially in newer regions and markets.
Our ability to achieve and maintain targeted levels of productivity and efficiency in our distribution centers.
Our ability to lease or acquire acceptable new store sites with favorable demographics and long term financial returns.
Our ability to identify and to successfully enter new geographic markets.
Our ability to achieve planned gross margins, by effectively managing inventories, markdowns, and shrink.
Our ability to effectively manage all operating costs of the business, the largest of which are payroll and benefit costs for stores and distribution centers.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information regarding shares of common stock we repurchased during the second quarter of 2008 is as follows:
| | | | | | | | | Maximum number (or |
| | | | | | | Total number of | | approximate dollar |
| | Total | | | | | shares (or units) | | value) of shares (or |
| | number of | | Average | | purchased as part | | units) that may yet be |
| | shares (or | | price paid | | of publicly | | purchased under the |
| | units) | | per share | | announced plans or | | plans or programs |
| Period | | purchased1 | | (or unit) | | programs | | ($000) |
| May (5/4/2008-5/31/2008) | | 438,047 | | $ | 36.19 | | 435,000 | | $ | 207,000 |
| |
| June (6/1/2008-7/5/2008) | | 905,456 | | $ | 36.92 | | 904,050 | | $ | 174,000 |
| |
| July (7/6/2008-8/2/2008) | | 692,187 | | $ | 38.32 | | 686,801 | | $ | 147,000 |
| |
| Total | | 2,035,690 | | $ | 37.24 | | 2,025,851 | | $ | 147,000 |
| | | | | | | | | | | |
1We acquired 9,839 shares during the quarter ended August 2, 2008 related to income tax withholdings for restricted stock. All remaining shares were repurchased under the two-year $600.0 million stock repurchase program we publicly announced in January 2008.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders, held on May 22, 2008 (the “2008 Annual Meeting”), the stockholders of the Company voted on and approved the following proposals:
Proposal 1: To elect three Class I directors (Stuart G. Moldaw, George P. Orban, and Donald H. Seiler) for a three-year term.
Proposal 2: To approve the adoption of the Ross Stores, Inc. 2008 Equity Incentive Plan
Proposal 3: To ratify the appointment of Deloitte & Touche LLP as the Company’s independent auditors for the fiscal year ending January 31, 2009.
2008 Annual Meeting Election Results
PROPOSAL 1:ELECTION OF DIRECTORS
| DIRECTOR | | IN FAVOR | | WITHHELD | | TERM EXPIRES |
| Stuart G. Moldaw* | | 104,086,618 | | 21,475,929 | | 2011 |
| George P. Orban | | 107,713,999 | | 17,848,547 | | 2011 |
| Donald H. Seiler | | 108,014,364 | | 17,548,182 | | 2011 |
*Mr. Moldaw passed away subsequent to the election.
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PROPOSAL 2:ADOPTION OF ROSS STORES, INC. 2008 EQUITY INCENTIVE PLAN
| FOR | AGAINST | ABSTAIN |
| 78,984,291 | 38,302,837 | 562,354 |
PROPOSAL 3:RATIFICATION OF THE APPOINTMENT OF DELOITTE & TOUCHE LLP AS INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING JANUARY 31, 2009
| FOR | AGAINST | ABSTAIN |
| 124,957,191 | 544,865 | 60,490 |
Item 6. Exhibits
Incorporated herein by reference to the list of Exhibits contained in the Exhibit Index within this Report.
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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: September 10, 2008 | By: | /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 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. |
| |
| 10.2 | | Ross Stores, Inc. 2008 Equity Incentive Plan, incorporated by reference to the appendix to the Definitive Proxy Statement on Schedule 14A filed by Ross Stores, Inc. on April 14, 2008. |
| |
| 10.3 | | Form of Nonemployee Director Equity Notice of Grant of Restricted Stock and Restricted Stock Agreement under the Ross Stores, Inc. 2008 Equity Incentive Plan, incorporated by reference to Exhibit 99.2 to the Form 8-K filed by Ross Stores, Inc. on May 23, 2008. |
| |
| 10.4 | | Form of Nonemployee Director Equity Notice of Grant of Restricted Stock Units and Restricted Stock Units Agreement under the Ross Stores, Inc. 2008 Equity Incentive Plan, incorporated by reference to Exhibit 99.3 to the Form 8-K filed by Ross Stores, Inc. on May 23, 2008. |
| |
| 10.5 | | Form of Notice of Grant of Restricted Stock and Restricted Stock Agreement under the Ross Stores, Inc. 2008 Equity Incentive Plan, incorporated by reference to Exhibit 99.4 to the Form 8-K filed by Ross Stores, Inc. on May 23, 2008. |
| |
| 10.6 | | Form of Notice of Grant of Restricted Stock Units and Restricted Stock Units Agreement under the Ross Stores, Inc. 2008 Equity Incentive Plan, incorporated by reference to Exhibit 99.5 to the Form 8-K filed by Ross Stores, Inc. on May 23, 2008. |
| |
| 10.7 | | Form of Notice of Grant of Performance Shares and Performance Share Agreement under the Ross Stores, Inc. 2008 Equity Incentive Plan, incorporated by reference to Exhibit 99.6 to the Form 8-K filed by Ross Stores, Inc. on May 23, 2008. |
| |
| 10.8 | | Form of Notice of Grant of Stock Option and Stock Option Agreement under the Ross Stores, Inc. 2008 Equity Incentive Plan, incorporated by reference to Exhibit 99.7 to the Form 8-K filed by Ross Stores, Inc. on May 23, 2008. |
| |
| 15 | | Letter re: Unaudited Interim Financial Information from Deloitte & Touche LLP dated September 9, 2008. |
| |
| 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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