ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Earnings
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($000, except stores and per share data, unaudited)
|
April 30, 2016
|
|
|
May 2, 2015
|
|
Sales
|
$
|
3,088,995
|
|
|
$
|
2,938,148
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
Cost of goods sold
|
2,176,205
|
|
|
2,067,455
|
|
Selling, general and administrative
|
436,924
|
|
|
409,298
|
|
Interest expense, net
|
4,364
|
|
|
2,003
|
|
Total costs and expenses
|
2,617,493
|
|
|
2,478,756
|
|
|
|
|
|
Earnings before taxes
|
471,502
|
|
|
459,392
|
|
Provision for taxes on earnings
|
180,868
|
|
|
177,187
|
|
Net earnings
|
$
|
290,634
|
|
|
$
|
282,205
|
|
|
|
|
|
Earnings per share
|
|
|
|
Basic
|
$
|
0.73
|
|
|
$
|
0.69
|
|
Diluted
|
$
|
0.73
|
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (000)
|
|
|
|
Basic
|
395,799
|
|
|
407,653
|
|
Diluted
|
398,812
|
|
|
411,386
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
Cash dividends declared per share
|
$
|
0.1350
|
|
|
$
|
0.1175
|
|
|
|
|
|
|
|
|
|
Stores open at end of period
|
1,473
|
|
|
1,399
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($000, unaudited)
|
April 30, 2016
|
|
|
May 2, 2015
|
|
Net earnings
|
$
|
290,634
|
|
|
$
|
282,205
|
|
|
|
|
|
Other comprehensive (loss) income:
|
|
|
|
Change in unrealized loss on investments, net of tax
|
(12
|
)
|
|
(82
|
)
|
Comprehensive income
|
$
|
290,622
|
|
|
$
|
282,123
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
($000, unaudited)
|
April 30, 2016
|
|
|
January 30, 2016
|
|
|
May 2, 2015
|
|
Assets
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
910,025
|
|
|
$
|
761,602
|
|
|
$
|
761,356
|
|
Short-term investments
|
1,727
|
|
|
1,737
|
|
|
500
|
|
Accounts receivable
|
96,244
|
|
|
73,627
|
|
|
88,258
|
|
Merchandise inventory
|
1,498,449
|
|
|
1,419,104
|
|
|
1,504,281
|
|
Prepaid expenses and other
|
122,678
|
|
|
116,125
|
|
|
119,381
|
|
Total current assets
|
2,629,123
|
|
|
2,372,195
|
|
|
2,473,776
|
|
|
|
|
|
|
|
Property and Equipment
|
|
|
|
|
|
Land and buildings
|
1,090,045
|
|
|
1,084,328
|
|
|
948,551
|
|
Fixtures and equipment
|
2,276,885
|
|
|
2,244,790
|
|
|
1,962,115
|
|
Leasehold improvements
|
938,488
|
|
|
920,392
|
|
|
876,002
|
|
Construction-in-progress
|
64,158
|
|
|
90,399
|
|
|
302,464
|
|
|
4,369,576
|
|
|
4,339,909
|
|
|
4,089,132
|
|
Less accumulated depreciation and amortization
|
2,051,120
|
|
|
1,997,003
|
|
|
1,812,385
|
|
Property and equipment, net
|
2,318,456
|
|
|
2,342,906
|
|
|
2,276,747
|
|
|
|
|
|
|
|
Long-term investments
|
1,333
|
|
|
1,331
|
|
|
3,141
|
|
Other long-term assets
|
165,265
|
|
|
152,687
|
|
|
169,795
|
|
Total assets
|
$
|
5,114,177
|
|
|
$
|
4,869,119
|
|
|
$
|
4,923,459
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
Accounts payable
|
$
|
1,056,257
|
|
|
$
|
945,559
|
|
|
$
|
1,128,808
|
|
Accrued expenses and other
|
382,107
|
|
|
376,522
|
|
|
389,804
|
|
Accrued payroll and benefits
|
201,830
|
|
|
280,766
|
|
|
198,081
|
|
Income taxes payable
|
110,702
|
|
|
—
|
|
|
108,314
|
|
Total current liabilities
|
1,750,896
|
|
|
1,602,847
|
|
|
1,825,007
|
|
|
|
|
|
|
|
Long-term debt
|
396,142
|
|
|
396,025
|
|
|
395,677
|
|
Other long-term liabilities
|
286,897
|
|
|
268,168
|
|
|
296,490
|
|
Deferred income taxes
|
140,801
|
|
|
130,088
|
|
|
72,786
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
Common stock
|
4,001
|
|
|
4,023
|
|
|
4,120
|
|
Additional paid-in capital
|
1,159,933
|
|
|
1,122,329
|
|
|
1,066,494
|
|
Treasury stock
|
(266,452
|
)
|
|
(229,525
|
)
|
|
(222,571
|
)
|
Accumulated other comprehensive income
|
170
|
|
|
182
|
|
|
248
|
|
Retained earnings
|
1,641,789
|
|
|
1,574,982
|
|
|
1,485,208
|
|
Total stockholders’ equity
|
2,539,441
|
|
|
2,471,991
|
|
|
2,333,499
|
|
Total liabilities and stockholders’ equity
|
$
|
5,114,177
|
|
|
$
|
4,869,119
|
|
|
$
|
4,923,459
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($000, unaudited)
|
April 30, 2016
|
|
|
May 2, 2015
|
|
Cash Flows From Operating Activities
|
|
|
|
Net earnings
|
$
|
290,634
|
|
|
$
|
282,205
|
|
Adjustments to reconcile net earnings to net cash provided
by operating activities:
|
|
|
|
Depreciation and amortization
|
73,878
|
|
|
63,316
|
|
Stock-based compensation
|
17,716
|
|
|
14,288
|
|
Deferred income taxes
|
10,713
|
|
|
(944
|
)
|
Tax benefit from equity issuance
|
20,538
|
|
|
37,320
|
|
Excess tax benefit from stock-based compensation
|
(20,538
|
)
|
|
(37,255
|
)
|
Change in assets and liabilities:
|
|
|
|
Merchandise inventory
|
(79,345
|
)
|
|
(131,606
|
)
|
Other current assets
|
(29,150
|
)
|
|
(27,539
|
)
|
Accounts payable
|
123,886
|
|
|
143,038
|
|
Other current liabilities
|
54,415
|
|
|
63,217
|
|
Other long-term, net
|
6,333
|
|
|
7,948
|
|
Net cash provided by operating activities
|
469,080
|
|
|
413,988
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
Additions to property and equipment
|
(79,724
|
)
|
|
(106,928
|
)
|
Increase in restricted cash and investments
|
(44
|
)
|
|
(9
|
)
|
Purchases of investments
|
—
|
|
|
(718
|
)
|
Proceeds from investments
|
—
|
|
|
601
|
|
Net cash used in investing activities
|
(79,768
|
)
|
|
(107,054
|
)
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
Excess tax benefit from stock-based compensation
|
20,538
|
|
|
37,255
|
|
Issuance of common stock related to stock plans
|
5,500
|
|
|
7,036
|
|
Treasury stock purchased
|
(36,933
|
)
|
|
(61,977
|
)
|
Repurchase of common stock
|
(175,758
|
)
|
|
(175,757
|
)
|
Dividends paid
|
(54,236
|
)
|
|
(48,743
|
)
|
Net cash used in financing activities
|
(240,889
|
)
|
|
(242,186
|
)
|
|
|
|
|
Net increase in cash and cash equivalents
|
148,423
|
|
|
64,748
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
Beginning of period
|
761,602
|
|
|
696,608
|
|
End of period
|
$
|
910,025
|
|
|
$
|
761,356
|
|
|
|
|
|
Supplemental Cash Flow Disclosures
|
|
|
|
Interest paid
|
$
|
4,219
|
|
|
$
|
4,148
|
|
Income taxes paid
|
$
|
26,763
|
|
|
$
|
43,302
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
Three Months Ended
April 30, 2016
and
May 2, 2015
(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
April 30, 2016
and
May 2, 2015
, the results of operations and comprehensive income for the
three
month periods ended
April 30, 2016
and
May 2, 2015
, and cash flows for the
three
month periods ended
April 30, 2016
and
May 2, 2015
. The Condensed Consolidated Balance Sheet as of
January 30, 2016
, presented herein, has been derived from the Company’s audited consolidated financial statements for the fiscal year then ended.
Accounting policies followed by the Company are described in Note A to the audited consolidated financial statements for the fiscal year ended
January 30, 2016
. 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
January 30, 2016
.
The results of operations and comprehensive income for the
three
month periods ended
April 30, 2016
and
May 2, 2015
presented herein are not necessarily indicative of the results to be expected for the full fiscal year.
Stock dividend.
In March 2015, the Company's Board of Directors declared a
two
-for-one split of the Company's common stock issued in the form of a stock dividend. Stockholders of record as of April 22, 2015 were issued one additional share of common stock on June 11, 2015 for each share held. All share and per share amounts have been adjusted to reflect the stock split.
Restricted cash, cash equivalents, and investments.
The Company has restricted cash, cash equivalents, and investments that 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 following table summarizes total restricted cash, cash equivalents, and investments which were included in Prepaid expenses and other and Other long-term assets in the Condensed Consolidated Balance Sheets as of
April 30, 2016
,
January 30, 2016
, and
May 2, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Assets ($000)
|
April 30, 2016
|
|
|
January 30, 2016
|
|
|
May 2, 2015
|
|
Prepaid expenses and other
|
$
|
15,778
|
|
|
$
|
15,770
|
|
|
$
|
19,706
|
|
Other long-term assets
|
55,940
|
|
|
55,913
|
|
|
56,085
|
|
Total
|
$
|
71,718
|
|
|
$
|
71,683
|
|
|
$
|
75,791
|
|
The classification between current and long-term is based on the timing of expected payments of the insurance obligations.
Property and equipment.
As of
April 30, 2016
and
May 2, 2015
, the Company had
$5.6 million
and
$18.0 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
$0.1350
per common share in March 2016 and
$0.1175
per common share in February, May, August, and November 2015, respectively.
In
May 2016
, the Company's Board of Directors declared a cash dividend of
$0.1350
per common share, payable on
June 30, 2016
.
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 laws and consumer protection laws. Class action litigation remains pending as of
April 30, 2016
.
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, customer, intellectual property, 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.
In March 2016, the FASB issued Accounting Standard Update ("ASU") No. 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This ASU simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for the Company's annual and interim reporting periods beginning in fiscal 2017. The Company is currently assessing the impact adoption of this standard will have on its consolidated financial statements.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02,
Leases (Topic 842).
This ASU requires balance sheet recognition of the following 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. ASU 2016-02 is effective for the Company's annual and interim reporting periods beginning in fiscal 2019. The Company is currently evaluating the effect adoption of this new guidance will have on its consolidated financial statements.
Recently issued and adopted accounting standards.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
, which simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for annual and interim reporting periods after December 15, 2016, with early adoption permitted. The Company early adopted ASU 2015-17 retrospectively, as of January 30, 2016. As a result,
$12.6 million
of its deferred tax assets previously presented in current assets have been reclassified to long-term deferred tax liabilities in the Condensed Consolidated Balance Sheet as of May 2, 2015. Adoption of this standard did not impact results of operations, retained earnings, or cash flows in the current or previous annual reporting periods. See Note F.
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 periods ended
April 30, 2016
. The fair value of the Company’s financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
|
April 30, 2016
|
|
|
January 30, 2016
|
|
|
May 2, 2015
|
|
Cash and cash equivalents (
Level 1)
|
|
$
|
910,025
|
|
|
$
|
761,602
|
|
|
$
|
761,356
|
|
|
|
|
|
|
|
|
Investments
(Level 2)
|
|
$
|
3,060
|
|
|
$
|
3,068
|
|
|
$
|
3,641
|
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents
(Level 1)
|
|
$
|
67,998
|
|
|
$
|
67,947
|
|
|
$
|
72,006
|
|
|
|
|
|
|
|
|
Restricted investments
(Level 1)
|
|
$
|
3,720
|
|
|
$
|
3,736
|
|
|
$
|
3,785
|
|
The underlying assets in the Company’s non-qualified deferred compensation program as of
April 30, 2016
,
January 30, 2016
, and
May 2, 2015
(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)
|
April 30, 2016
|
|
|
January 30, 2016
|
|
|
May 2, 2015
|
|
Level 1
|
$
|
81,285
|
|
|
$
|
73,633
|
|
|
$
|
89,536
|
|
Level 2
|
15,519
|
|
|
12,440
|
|
|
13,325
|
|
Total
|
$
|
96,804
|
|
|
$
|
86,073
|
|
|
$
|
102,861
|
|
Note C: Stock-Based Compensation
Stock-based compensation.
For the
three
month periods ended
April 30, 2016
and
May 2, 2015
, the Company recognized stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($000)
|
April 30, 2016
|
|
|
May 2, 2015
|
|
Restricted stock
|
$
|
9,065
|
|
|
$
|
8,573
|
|
Performance awards
|
7,949
|
|
|
5,106
|
|
Employee stock purchase plan
|
702
|
|
|
609
|
|
Total
|
$
|
17,716
|
|
|
$
|
14,288
|
|
Total stock-based compensation recognized in the Company's Condensed Consolidated Statements of Earnings for the
three
month periods ended
April 30, 2016
and
May 2, 2015
is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Statements of Earnings Classification ($000)
|
April 30, 2016
|
|
|
May 2, 2015
|
|
Cost of goods sold
|
$
|
7,830
|
|
|
$
|
7,063
|
|
Selling, general and administrative
|
9,886
|
|
|
7,225
|
|
Total
|
$
|
17,716
|
|
|
$
|
14,288
|
|
Restricted stock.
The Company grants shares of restricted stock or restricted stock units to directors, officers, and key employees. The market value of shares of restricted stock and of the stock underlying restricted stock units 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
April 30, 2016
and
May 2, 2015
, shares purchased by the Company for tax withholding totaled
636,997
and
1,173,198
, respectively, and are considered treasury shares which are available for reissuance.
Performance shares.
The Company has a performance share award program for senior executives. A performance share award represents a right to receive shares of restricted stock or restricted stock units 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 or units then vest over a service period, generally
two
to
three
years from the date the performance award was granted. The release of shares related to restricted stock units earned are deferred generally for
one
year from the date earned.
As of
April 30, 2016
, shares related to unvested restricted stock and performance share awards totaled
5.6 million
shares. A summary of restricted stock and performance share award activity for the
three
month period ended
April 30, 2016
is presented below:
|
|
|
|
|
|
|
|
(000, except per share data)
|
Number of
shares
|
|
|
Weighted
average
grant date
fair value
|
|
Unvested at January 30, 2016
|
6,104
|
|
|
$
|
34.87
|
|
Awarded
|
1,154
|
|
|
56.41
|
|
Released
|
(1,575
|
)
|
|
26.99
|
|
Forfeited
|
(81
|
)
|
|
34.09
|
|
Unvested at April 30, 2016
|
5,602
|
|
|
$
|
41.82
|
|
The unamortized compensation expense at
April 30, 2016
was
$130.2 million
which is expected to be recognized over a weighted-average remaining period of
2.4
years. The unamortized compensation expense at
May 2, 2015
was
$120.9 million
, which was expected to be recognized over a weighted-average remaining period of
2.3
years.
Employee stock purchase plan.
Under the Employee Stock Purchase Plan (“ESPP”), eligible employees participating in the quarterly offering period can choose to spend 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 each year. The purchase price of the stock is
85%
of the closing market price on the date of purchase. Purchases occur on 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.
Stock option activity.
A summary of the stock option activity for the
three
month period ended
April 30, 2016
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(000, except per share data)
|
Number of
shares
|
|
|
Weighted average
exercise price
|
|
|
Weighted average remaining contractual term
|
|
Aggregate intrinsic value
|
|
Outstanding at January 30, 2016
|
310
|
|
|
$
|
7.34
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(210
|
)
|
|
7.26
|
|
|
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at April 30, 2016, all vested
|
100
|
|
|
$
|
7.52
|
|
|
0.59
|
|
$
|
4,928
|
|
No
stock options were granted during the
three
month periods ended
April 30, 2016
and
May 2, 2015
.
The following table summarizes information about the weighted average remaining contractual life (in years) and the weighted average exercise prices for stock options both outstanding and exercisable as of
April 30, 2016
(number of shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding and exercisable
|
Exercise price range
|
|
Number of shares
|
|
|
Remaining life
|
|
Exercise price
|
|
$
|
6.08
|
|
to
|
$
|
6.35
|
|
|
8
|
|
|
0.34
|
|
$
|
6.22
|
|
6.89
|
|
to
|
6.89
|
|
|
37
|
|
|
0.05
|
|
6.89
|
|
7.66
|
|
to
|
8.19
|
|
|
55
|
|
|
1.00
|
|
8.13
|
|
$
|
6.08
|
|
to
|
$
|
8.19
|
|
|
100
|
|
|
0.59
|
|
$
|
7.52
|
|
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 and restricted stock units.
For the
three
month periods ended
April 30, 2016
and
May 2, 2015
, approximately
300
and
285,100
weighted average shares, respectively, were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive for those periods 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
|
|
April 30, 2016
|
|
|
|
|
|
Shares
|
395,799
|
|
|
3,013
|
|
|
398,812
|
|
Amount
|
$
|
0.73
|
|
|
$
|
—
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
May 2, 2015
|
|
|
|
|
|
Shares
|
407,653
|
|
|
3,733
|
|
|
411,386
|
|
Amount
|
$
|
0.69
|
|
|
$
|
—
|
|
|
$
|
0.69
|
|
Note E: Debt
Senior notes.
Unsecured senior debt, net of unamortized discounts and debt issuance costs, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
|
April 30, 2016
|
|
|
January 30, 2016
|
|
|
May 2, 2015
|
|
6.38% Series A Senior Notes due 2018
|
|
$
|
84,914
|
|
|
$
|
84,906
|
|
|
$
|
84,881
|
|
6.53% Series B Senior Notes due 2021
|
|
64,887
|
|
|
64,882
|
|
|
64,866
|
|
3.375% Senior Notes due 2024
|
|
246,341
|
|
|
246,237
|
|
|
245,930
|
|
Total
|
|
$
|
396,142
|
|
|
$
|
396,025
|
|
|
$
|
395,677
|
|
As of
April 30, 2016
, 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
April 30, 2016
, the Company also had outstanding
two
other series of unsecured senior notes in the aggregate principal amount of
$150 million
, held by various institutional investors. The Series A notes totaling
$85 million
are due in
December 2018
and bear interest at a rate of
6.38%
. The Series B notes totaling
$65 million
are due in
December 2021
and bear interest at a rate of
6.53%
. Borrowings under these senior notes are subject to certain financial covenants, including interest coverage and other financial ratios. As of
April 30, 2016
, the Company was in compliance with these covenants.
As of
April 30, 2016
,
January 30, 2016
, and
May 2, 2015
, total unamortized discount and debt issuance costs were
$3.9 million
,
$4.0 million
, and
$4.3 million
, respectively, and were classified as a reduction of Long-term debt.
The 2024 Notes, Series A, and Series B senior notes are all subject to prepayment penalties for early payment of principal.
The aggregate fair value of the three outstanding senior note issuances was approximately
$431 million
,
$423 million
, and
$430 million
as of
April 30, 2016
,
January 30, 2016
, and
May 2, 2015
, respectively. 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.
Interest expense for the
three
month periods ended
April 30, 2016
and
May 2, 2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($000)
|
April 30, 2016
|
|
|
May 2, 2015
|
|
Interest expense on long-term debt
|
$
|
4,643
|
|
|
$
|
4,642
|
|
Other interest expense
|
323
|
|
|
341
|
|
Capitalized interest
|
(4
|
)
|
|
(2,810
|
)
|
Interest income
|
(598
|
)
|
|
(170
|
)
|
Interest expense, net
|
$
|
4,364
|
|
|
$
|
2,003
|
|
Revolving credit facility.
In April 2016, the Company entered into a new
$600 million
unsecured revolving credit facility. This credit facility, which replaced the Company's previous
$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. The revolving credit facility may be extended, at the Company’s option, for up to
two
additional
one
year periods, subject to customary conditions. As of
April 30, 2016
, 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 certain financial covenants that include a leverage ratio. As of
April 30, 2016
, the Company was in compliance with these covenants.
Note F: Taxes on Earnings
As of
April 30, 2016
,
January 30, 2016
, and
May 2, 2015
, the reserves for unrecognized tax benefits were
$100.1 million
,
$94.2 million
, and
$108.1 million
inclusive of
$20.3 million
,
$18.8 million
, and
$25.1 million
of related interest and penalties, respectively. The Company accounts for interest and penalties related to unrecognized tax benefits as a part of its provision for taxes on earnings. If recognized,
$49.4 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.
The Company believes it is reasonably possible that certain federal and state tax matters may be concluded or statutes of limitations may lapse during the next twelve months. Accordingly, the total amount of unrecognized tax benefits may decrease, reducing the provision for taxes on earnings by up to
$5.1 million
.
The Company is open to audit by the Internal Revenue Service under the statute of limitations for fiscal years
2012
through
2015
. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years
2011
through
2015
. Certain federal and 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.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Ross Stores, Inc.
Dublin, California
We have reviewed the accompanying condensed consolidated balance sheets of Ross Stores, Inc. and subsidiaries (the “Company”) as of
April 30, 2016
and
May 2, 2015
, and the related condensed consolidated statements of earnings and comprehensive income and of cash flows for the
three month periods
ended
April 30, 2016
and
May 2, 2015
. These interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 Public Company Accounting Oversight Board (United States), 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.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them 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), the consolidated balance sheets of Ross Stores, Inc. and subsidiaries as of
January 30, 2016
, 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
March 29, 2016
, 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
January 30, 2016
, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/Deloitte & Touche LLP
San Francisco, California
June 8, 2016
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
2015
. 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
2015
. 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
1,295
locations in
34 states, the District of Columbia and Guam
as of
April 30, 2016
. 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
178
dd’s DISCOUNTS stores in
15 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.
Stock dividend.
In March 2015, we declared a
two
-for-one split of our common stock issued in the form of a stock dividend. Stockholders of record as of April 22, 2015 were issued one additional share of common stock on June 11, 2015 for each share held. All share and per share amounts in this report have been adjusted to reflect the stock split.
Results of Operations
The following table summarizes the financial results for the
three month periods
ended
April 30, 2016
and
May 2, 2015
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 30, 2016
|
|
|
May 2, 2015
|
|
Sales
|
|
|
|
Sales (millions)
|
$
|
3,089
|
|
|
$
|
2,938
|
|
Sales growth
|
5.1
|
%
|
|
9.6
|
%
|
Comparable store sales growth
|
2
|
%
|
|
5
|
%
|
|
|
|
|
Costs and expenses (as a percent of sales)
|
|
|
|
Cost of goods sold
|
70.5
|
%
|
|
70.4
|
%
|
Selling, general and administrative
|
14.1
|
%
|
|
13.9
|
%
|
Interest expense, net
|
0.1
|
%
|
|
0.1
|
%
|
|
|
|
|
Earnings before taxes (as a percent of sales)
|
15.3
|
%
|
|
15.6
|
%
|
|
|
|
|
Net earnings (as a percent of sales)
|
9.4
|
%
|
|
9.6
|
%
|
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
|
April 30, 2016
|
|
|
May 2, 2015
|
|
Beginning of the period
|
1,446
|
|
|
1,362
|
|
Opened in the period
|
28
|
|
|
37
|
|
Closed in the period
|
(1
|
)
|
|
—
|
|
End of the period
|
1,473
|
|
|
1,399
|
|
Sales.
Sales for the
three month period
ended
April 30, 2016
increased
$151 million
, or
5.1%
, compared to the
three month period
ended
May 2, 2015
, due to the opening of
74
net new stores between
May 2, 2015
and
April 30, 2016
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
April 30, 2016
and
May 2, 2015
is shown below:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 30, 2016
|
|
|
May 2, 2015
|
|
Ladies
|
29
|
%
|
|
30
|
%
|
Home Accents and Bed and Bath
|
24
|
%
|
|
23
|
%
|
Shoes
|
14
|
%
|
|
14
|
%
|
Accessories, Lingerie, Fine Jewelry, and Fragrances
|
13
|
%
|
|
13
|
%
|
Men's
|
12
|
%
|
|
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
April 30, 2016
, 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
April 30, 2016
increased
$109 million
compared to the same period in the prior year, mainly due to increased sales from the opening of
74
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
April 30, 2016
increased
approximately 10 basis points from the same period in the prior year, mainly due to a 55 basis point increase in distribution expenses from the impact of opening a new distribution center in the second quarter of the prior year and the timing of packaway-related costs that benefited the first quarter of 2015. These expenses were partially offset by merchandise margins that increased 35 basis points and also by 10 basis points in lower buying costs.
We cannot be sure that the gross profit margins realized for the
three month period
ended
April 30, 2016
will continue in the future.
Selling, general and administrative expenses.
For the
three month period
ended
April 30, 2016
, selling, general and administrative expenses ("SG&A")
increased
$28 million
compared to the same period in the prior year, mainly due to increased store operating costs reflecting the opening of
74
net new stores between
May 2, 2015
and
April 30, 2016
.
Selling, general and administrative expenses as a percentage of sales for the three month period ended
April 30, 2016
increased 20 basis points compared to the same period in the prior year due to lack of leverage from the two percent increase in comparable store sales and increases in hourly wages.
Interest expense, net
.
Net interest expense as a percentage of sales for the
three month period
ended
April 30, 2016
increased compared to the same period in the prior year primarily due to a reduction of capitalized interest.
Interest expense for the
three month periods
ended
April 30, 2016
and
May 2, 2015
consists of the following:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($000)
|
April 30, 2016
|
|
|
May 2, 2015
|
|
Interest expense on long-term debt
|
$
|
4,643
|
|
|
$
|
4,642
|
|
Other interest expense
|
323
|
|
|
341
|
|
Capitalized interest
|
(4
|
)
|
|
(2,810
|
)
|
Interest income
|
(598
|
)
|
|
(170
|
)
|
Interest expense, net
|
$
|
4,364
|
|
|
$
|
2,003
|
|
Taxes on earnings.
Our effective tax rates for the three month periods ended
April 30, 2016
and
May 2, 2015
were approximately
38%
and 39%, 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 rate is impacted by changes in law, location of new stores, level of earnings, and the resolution of tax positions with various taxing authorities. We anticipate that our effective tax rate for fiscal
2016
will be between 37% and 38%.
Net earnings.
Net earnings as a percentage of sales for the
three month period
ended
April 30, 2016
was lower compared to the same period in the prior year primarily due to higher cost of goods sold and higher SG&A expenses as a percentage of sales.
Earnings per share
. Diluted earnings per share for the
three month period
ended
April 30, 2016
was
$0.73
compared to
$0.69
for the
three month period
ended
May 2, 2015
. The increase in diluted earnings per share for the
three month period
ended
April 30, 2016
is attributable to an
increase
in net earnings and a
3%
reduction
in weighted average diluted shares outstanding due to the 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, rent, 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.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
($000)
|
April 30, 2016
|
|
|
May 2, 2015
|
|
Cash provided by operating activities
|
$
|
469,080
|
|
|
$
|
413,988
|
|
Cash used in investing activities
|
(79,768
|
)
|
|
(107,054
|
)
|
Cash used in financing activities
|
(240,889
|
)
|
|
(242,186
|
)
|
Net increase in cash and cash equivalents
|
$
|
148,423
|
|
|
$
|
64,748
|
|
Operating Activities
Net cash provided by operating activities was
$469.1 million
and
$414.0 million
for the
three
month periods ended
April 30, 2016
and
May 2, 2015
, 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
April 30, 2016
, compared to the same period in the prior year was primarily driven by the changes in packaway inventory levels and the timing of packaway receipts versus last year and higher earnings. Changes in packaway inventory levels and the timing of packaway receipts and related payments versus last year resulted in lower accounts payable leverage (defined as accounts payable divided by merchandise inventory) which was
70%
,
67%
, and
75%
as of
April 30, 2016
,
January 30, 2016
, and
May 2, 2015
, 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 purchases, but typically packaway remains in storage less than six months. We expect to continue to take advantage of packaway inventory opportunities to deliver bargains to our customers.
Changes in packaway inventory levels impact our operating cash flow. As of
April 30, 2016
, packaway inventory was
46%
of total inventory compared to
47%
at the end of fiscal
2015
. As of
May 2, 2015
, packaway inventory was
45%
of total inventory compared to
45%
at the end of fiscal
2014
.
Investing Activities
Net cash used in investing activities was
$79.8 million
and
$107.1 million
for the
three
month periods ended
April 30, 2016
and
May 2, 2015
, respectively. The
decrease
in cash used for investing activities for the
three
month period ended
April 30, 2016
, compared to the
three
month period ended
May 2, 2015
was primarily due to a reduction in our capital expenditures.
Our capital expenditures were
$79.7 million
and
$106.9 million
for the
three
month periods ended
April 30, 2016
and
May 2, 2015
, respectively. Our capital expenditures include costs to build or expand 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 currently forecasting approximately
$425 million
in capital expenditures for fiscal year
2016
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, and for various other expenditures related to our stores, distribution centers, buying and corporate offices. We expect to primarily fund capital expenditures with available cash and cash flows from operations.
Financing Activities
Net cash used in financing activities was
$240.9 million
and
$242.2 million
for the
three
month periods ended
April 30, 2016
and
May 2, 2015
, respectively. For the
three
month periods ended
April 30, 2016
and
May 2, 2015
, our liquidity and capital requirements were provided by available cash and cash flows from operations.
We repurchased
3.1 million
and
3.4 million
shares of common stock for aggregate purchase prices of approximately
$175.8 million
and
$175.8 million
during the
three
month periods ended
April 30, 2016
, and
May 2, 2015
, respectively. We also acquired
0.6 million
and
1.2 million
shares of treasury stock from our employee stock equity compensation programs, for aggregate purchase prices of approximately
$36.9 million
and
$62.0 million
during the
three
month periods ended
April 30, 2016
and
May 2, 2015
, respectively. In February 2015, our Board of Directors approved a two-year $1.4 billion stock repurchase program for fiscal 2015 and 2016.
For the
three
month periods ended
April 30, 2016
and
May 2, 2015
, we paid cash dividends of
$54.2 million
and
$48.7 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
2016
.
In April 2016, we entered into a new
$600 million
unsecured revolving credit facility. This credit facility, which replaced our previous
$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 us to increase the size of our revolving 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. The revolving credit facility may be extended, at our option, for up to two additional one year periods, subject to customary conditions. As of
April 30, 2016
, 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 certain financial covenants that include a leverage ratio. As of
April 30, 2016
, we were in compliance with these covenants.
We estimate that existing cash 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, common stock repurchases, and quarterly dividend payments for at least the next twelve months.
Contractual Obligations
The table below presents our significant contractual obligations as of
April 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
Less than
one year
|
|
|
1 - 3
years
|
|
|
3 - 5
years
|
|
|
After 5
years
|
|
|
Total¹
|
|
|
|
|
|
Senior notes
|
$
|
—
|
|
|
$
|
85,000
|
|
|
$
|
—
|
|
|
$
|
315,000
|
|
|
$
|
400,000
|
|
Interest payment obligations
|
18,105
|
|
|
36,210
|
|
|
25,364
|
|
|
33,776
|
|
|
113,455
|
|
Operating leases (rent obligations)
|
461,341
|
|
|
899,918
|
|
|
595,794
|
|
|
502,595
|
|
|
2,459,648
|
|
New York buying office ground lease
²
|
6,418
|
|
|
12,835
|
|
|
12,835
|
|
|
950,964
|
|
|
983,052
|
|
Purchase obligations
|
1,948,131
|
|
|
10,091
|
|
|
1,623
|
|
|
—
|
|
|
1,959,845
|
|
Total contractual obligations
|
$
|
2,433,995
|
|
|
$
|
1,044,054
|
|
|
$
|
635,616
|
|
|
$
|
1,802,335
|
|
|
$
|
5,916,000
|
|
1
We have a
$100.1 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.
²Our New York buying office building is subject to a total 99-year ground lease.
Senior notes.
As of
April 30, 2016
, 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
April 30, 2016
we also had outstanding two other series of unsecured senior notes in the aggregate principal amount of
$150 million
, held by various institutional investors. The Series A notes totaling
$85 million
are due in
December 2018
and bear interest at a rate of
6.38%
. The Series B notes totaling
$65 million
are due in
December 2021
and bear interest at a rate of
6.53%
. Borrowings under these senior notes are subject to certain financial covenants, including interest coverage and other financial ratios. As of
April 30, 2016
, we were in compliance with these covenants.
The 2024 Notes, Series A, and Series B senior notes are all subject to prepayment penalties for early payment of principal.
Off-Balance Sheet Arrangements
Operating leases
. We currently lease all but three of our store locations, three warehouse facilities, and a buying office. In addition, we have a ground lease related to our New York buying office. Except for certain leasehold improvements and equipment, these leased locations do not represent long-term capital investments.
Two of the warehouses are in Carlisle, Pennsylvania with leases expiring in 2017 and 2018. The third warehouse is in Fort Mill, South Carolina, with a lease expiring in 2019. The leases for the two Carlisle, Pennsylvania warehouses contain renewal provisions.
We currently lease approximately 68,000 square feet of office space for our Los Angeles buying office. The lease term for this facility expires in 2017 and contains renewal provisions.
Purchase obligations.
As of
April 30, 2016
, we had purchase obligations of approximately
$1,960 million
. These 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.
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
April 30, 2016
,
January 30, 2016
, and
May 2, 2015
, we had
$15.3 million
,
$15.3 million
, and
$19.5 million
, respectively, in standby letters of credit outstanding and
$56.5 million
,
$56.4 million
and
$56.3 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
$27.9 million
,
$32.0 million
, and
$32.8 million
in trade letters of credit outstanding at
April 30, 2016
,
January 30, 2016
, and
May 2, 2015
, respectively.
Dividends.
In
May 2016
, our Board of Directors declared a cash dividend of
$0.1350
per common share, payable on
June 30, 2016
.
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.
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
2016
, there have been no significant changes to the policies discussed in our Annual Report on Form 10-K for the year ended
January 30, 2016
.
Recently issued accounting standards.
In March 2016, the FASB issued Accounting Standard Update ("ASU") No. 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This ASU simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for our annual and interim reporting periods beginning in fiscal 2017. We are currently assessing the impact adoption of this standard will have on our consolidated financial statements.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02,
Leases (Topic 842).
This ASU 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. ASU 2016-02 is effective for our annual and interim reporting periods beginning in fiscal 2019. We are currently evaluating the effect adoption of this new guidance will have on our consolidated financial statements.
Recently issued and adopted accounting standards.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
, which simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for annual and interim reporting periods after December 15, 2016, with early adoption permitted. We early adopted ASU 2015-17 retrospectively, as of January 30, 2016. As a result, $12.6 million of our deferred tax assets previously presented in current assets have been reclassified to long-term deferred tax liabilities in the Condensed Consolidated Balance Sheet as of May 2, 2015. Adoption of this standard did not impact results of operations, retained earnings, or cash flows in the current or previous annual reporting periods. See Note F.
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,” “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. As a result, 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.
|
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•
|
Unexpected changes in the level of consumer spending on or preferences for apparel and home-related merchandise.
|
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|
•
|
Unseasonable weather that may affect shopping patterns and consumer demand for seasonal apparel and other merchandise.
|
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•
|
Impacts from the macro-economic environment, financial and credit markets, and geopolitical conditions that affect consumer confidence and consumer disposable income.
|
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•
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In order to achieve our planned gross margins, we must effectively manage our inventories, markdowns, and inventory shortage.
|
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•
|
We depend 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.
|
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•
|
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.
|
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•
|
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.
|
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•
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To achieve growth, we need to expand in existing markets and enter new geographic markets.
|
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•
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We need to obtain acceptable new store sites with favorable consumer demographics to achieve our planned growth.
|
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•
|
Consumer problems or legal issues involving the quality, safety, or authenticity of products we sell.
|
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•
|
An adverse outcome in various legal, regulatory, or tax matters could increase our costs.
|
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•
|
Damage to our corporate reputation or brands could adversely affect our sales and operating results.
|
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•
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Our inability to continually attract, train, and retain associates with the retail talent necessary to execute our off-price retail strategies.
|
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•
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Our inability to effectively advertise and market our business.
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•
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We are subject to risks associated with importing merchandise from other countries.
|
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•
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A natural or man-made disaster in California or in another region where we have a concentration of stores, offices, or a distribution center could harm our business.
|
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•
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We may experience volatility in revenues and earnings.
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•
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To support our continuing operations, our new store and distribution center growth plans, and our stock repurchase program and quarterly dividends, we must maintain sufficient liquidity.
|
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.