Notes to Consolidated Financial Statements
Note A: Summary of Significant Accounting Policies
Business.
Ross Stores, Inc. and its subsidiaries (the “Company”) is an off-price retailer of first-quality, in-season, name brand and designer apparel, accessories, footwear, and home fashions for the entire family. At the end of fiscal
2016
, the Company operated
1,340
Ross Dress for Less
®
(“Ross”) locations in
36 states, the District of Columbia and Guam
, and
193
dd’s DISCOUNTS
®
stores in
15 states
. The Ross and dd's DISCOUNTS stores are supported by
six
distribution centers. The Company’s headquarters, one buying office, three operating distribution centers, two warehouses, and
24%
of its stores are located in California.
Segment reporting.
The Company has one reportable segment. The Company’s operations include only activities related to off-price retailing in stores throughout the United States.
Basis of presentation and fiscal year.
The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. Intercompany transactions and accounts have been eliminated. The Company follows the National Retail Federation fiscal calendar and utilizes a 52-53 week fiscal year whereby the fiscal year ends on the Saturday nearest to January 31. The fiscal years ended
January 28, 2017
,
January 30, 2016
and
January 31, 2015
are referred to as fiscal
2016
, fiscal
2015
, and fiscal
2014
, respectively, and were 52-week years.
Stock dividend.
In March 2015, the Company’s Board of Directors declared a
two
-for-one stock 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.
Use of accounting estimates.
The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles in the United States of America (“GAAP”) requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant accounting estimates include valuation reserves for inventory shortage, packaway inventory costs, useful lives of fixed assets, insurance reserves, and reserves for uncertain tax positions.
Purchase obligations.
As of
January 28, 2017
, the Company had purchase obligations of approximately
$2,146 million
. These purchase obligations primarily consist of merchandise inventory purchase orders, commitments related to construction projects, store fixtures and supplies, and information technology service, transportation, and maintenance contracts.
Cash and cash equivalents.
Cash equivalents consist of highly liquid, fixed income instruments purchased with an original maturity of three months or less.
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 Consolidated Balance Sheets as of
January 28, 2017
and
January 30, 2016
:
|
|
|
|
|
|
|
|
|
|
Restricted Assets ($000)
|
|
2016
|
|
|
2015
|
|
Prepaid expenses and other
|
|
$
|
13,642
|
|
|
$
|
15,770
|
|
Other long-term assets
|
|
54,567
|
|
|
55,913
|
|
Total
|
|
$
|
68,209
|
|
|
$
|
71,683
|
|
The classification between current and long-term is based on the timing of expected payments of the insurance obligations.
Estimated fair value of financial instruments.
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. See Note B and Note D for additional fair value information.
Cash and cash equivalents were
$1,111.6 million
and
$761.6 million
, at
January 28, 2017
and
January 30, 2016
, respectively, and include bank deposits and money market funds for which the fair value was determined using quoted prices for identical assets in active markets, which are considered to be Level 1 inputs under the fair value measurements and disclosures guidance.
Investments.
The Company’s investments are comprised of various debt securities. At
January 28, 2017
and
January 30, 2016
, these investments were classified as available-for-sale and are stated at fair value. Investments are classified as either short- or long-term based on their maturity dates and the Company’s intent. Investments with a maturity of less than one year are classified as short-term. See Note B for additional information.
Merchandise inventory.
Merchandise inventory is stated at the lower of cost (determined using a weighted average basis) or net realizable value. The Company purchases inventory that can either be shipped to stores or processed as packaway merchandise with the intent that it will be warehoused and released to stores at a later date. The timing of the release of packaway inventory to the stores is principally driven by the product mix and seasonality of the merchandise, and its relation to the Company’s store merchandise assortment plans. As such, the aging of packaway varies by merchandise category and seasonality of purchase, but typically packaway remains in storage less than
six months
. Merchandise inventory includes acquisition, processing, and storage costs related to packaway inventory. The cost of the Company’s merchandise inventory is reduced by valuation reserves for shortage based on historical shortage experience from the Company’s physical merchandise inventory counts and cycle counts.
Cost of goods sold.
In addition to
product costs, the Company includes in cost of goods sold its buying, distribution and freight expenses as well as occupancy costs, and depreciation and amortization related to the Company’s retail stores, buying, and distribution facilities. Buying expenses include costs to procure merchandise inventories. Distribution expenses include the cost of operating the Company’s distribution centers and warehouse facilities.
Property and equipment.
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful life of the asset, typically ranging from three to 12 years for equipment and information systems and 20 to 40 years for land improvements and buildings. Depreciation and amortization expense on property and equipment was
$302.5 million
,
$274.8 million
, and
$233.0 million
for fiscal
2016
,
2015
, and
2014
, respectively. The cost of leasehold improvements is amortized over the useful life of the asset or the applicable lease term, whichever is less. The Company capitalizes interest during the construction period. Interest capitalized was
$0.0 million
,
$6.5 million
and
$10.8 million
in fiscal
2016
,
2015
, and
2014
, respectively. As of
January 28, 2017
,
January 30, 2016
, and
January 31, 2015
the Company had
$25.7 million
,
$35.8 million
, and
$58.6 million
, respectively, of property and equipment purchased but not yet paid. These purchases are included in Property and Equipment and in Accounts payable and Accrued expenses and other in the accompanying Consolidated Balance Sheets.
Other long-term assets.
Other long-term assets as of
January 28, 2017
and
January 30, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
($000)
|
|
2016
|
|
|
2015
|
|
Deferred compensation (Note B)
|
|
$
|
100,423
|
|
|
$
|
86,073
|
|
Restricted cash and investments
|
|
54,567
|
|
|
55,913
|
|
Other
|
|
11,976
|
|
|
10,701
|
|
Total
|
|
$
|
166,966
|
|
|
$
|
152,687
|
|
Property and other long-term assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Intangible assets that are not subject to amortization, including goodwill, are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. Based on the Company’s evaluation during fiscal
2016
,
2015
, and
2014
, no impairment charges were recorded.
Store closures.
The Company continually reviews the operating performance of individual stores. For stores that are closed, the Company records a liability for future minimum lease payments net of estimated sublease recoveries and
related ancillary costs at the time the liability is incurred. The lease loss liability was
$1.2 million
and
$1.8 million
, as of
January 28, 2017
and
January 30, 2016
, respectively. Operating costs, including depreciation, of stores to be closed are expensed during the period they remain in use. The Company closed
six
stores in both
2016
and
2015
.
Accounts payable.
Accounts payable represents amounts owed to third parties at the end of the period. Accounts payable includes book cash overdrafts (checks issued under zero balance accounts not yet presented for payment) in excess of cash balances in such accounts of approximately
$96.3 million
and
$100.3 million
at
January 28, 2017
and
January 30, 2016
, respectively. The Company includes the change in book cash overdrafts in operating cash flows.
Insurance obligations.
The Company uses a combination of insurance and self-insurance for a number of risk management activities, including workers’ compensation, general liability, and employee-related health care benefits. The self-insurance and deductible liability is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. Self-insurance and deductible reserves as of
January 28, 2017
and
January 30, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
($000)
|
|
2016
|
|
|
2015
|
|
Workers’ compensation
|
|
$
|
94,920
|
|
|
$
|
93,452
|
|
General liability
|
|
39,679
|
|
|
39,895
|
|
Medical plans
|
|
4,899
|
|
|
4,155
|
|
Total
|
|
$
|
139,498
|
|
|
$
|
137,502
|
|
Workers’ compensation and self-insured medical plan liabilities are included in Accrued payroll and benefits and accruals for general liability are included in Accrued expenses and other in the accompanying Consolidated Balance Sheets.
Other long-term liabilities.
Other long-term liabilities as of
January 28, 2017
and
January 30, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
($000)
|
|
2016
|
|
|
2015
|
|
Income taxes
|
|
$
|
97,502
|
|
|
$
|
94,194
|
|
Deferred compensation (Note G)
|
|
100,423
|
|
|
86,073
|
|
Deferred rent
|
|
67,941
|
|
|
63,241
|
|
Tenant improvement allowances
|
|
20,554
|
|
|
20,300
|
|
Other
|
|
4,530
|
|
|
4,360
|
|
Total
|
|
$
|
290,950
|
|
|
$
|
268,168
|
|
Lease accounting.
When a lease contains “rent holidays” or requires fixed escalations of the minimum lease payments, the Company records rental expense on a straight-line basis over the term of the lease and the difference between the average rental amount charged to expense and the amount payable under the lease is recorded as deferred rent. The Company begins recording rent expense on the lease possession date. Tenant improvement allowances are included in Other long-term liabilities and are amortized over the lease term. Changes in tenant improvement allowances are included as a component of operating activities in the Consolidated Statements of Cash Flows.
Revenue recognition.
The Company recognizes revenue at the point of sale and maintains an allowance for estimated future returns. Sales of stored value cards are deferred until they are redeemed for the purchase of Company merchandise. The Company’s stored value cards do not have expiration dates. Based upon historical redemption rates, a small percentage of stored value cards will never be redeemed, which represents breakage. The Company recognizes income from stored value card breakage as a reduction of operating expenses when redemption by a customer is considered to be remote. Income recognized from breakage was not significant in fiscal
2016
,
2015
, and
2014
.
Sales tax collected is not recognized as revenue and amounts outstanding are included in Accrued expenses and other in the Consolidated Balance Sheets.
Allowance for sales returns.
An allowance for the gross margin loss on estimated sales returns is included in Accrued expenses and other in the Consolidated Balance Sheets. The allowance for sales returns consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
|
Beginning Balance
|
|
|
Additions
|
|
|
Returns
|
|
|
Ending Balance
|
|
Year ended:
|
|
|
|
|
|
|
|
|
January 28, 2017
|
|
$
|
7,955
|
|
|
$
|
761,350
|
|
|
$
|
(760,899
|
)
|
|
$
|
8,406
|
|
January 30, 2016
|
|
$
|
8,594
|
|
|
$
|
737,727
|
|
|
$
|
(738,366
|
)
|
|
$
|
7,955
|
|
January 31, 2015
|
|
$
|
7,431
|
|
|
$
|
717,040
|
|
|
$
|
(715,877
|
)
|
|
$
|
8,594
|
|
Store pre-opening.
Store pre-opening costs are expensed in the period incurred.
Advertising.
Advertising costs are expensed in the period incurred and are included in Selling, general and administrative expenses. Advertising costs for fiscal
2016
,
2015
, and
2014
were
$73.0 million
,
$77.1 million
, and
$72.1 million
, respectively.
Stock-based compensation.
The Company recognizes compensation expense based upon the grant date fair value of all stock-based awards, typically over the vesting period. See Note C for more information on the Company’s stock-based compensation plans.
Taxes on earnings.
The Company accounts for income taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than changes in the tax law or tax rates. ASC 740 clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s consolidated financial statements. ASC 740 prescribes a recognition threshold of more-likely-than-not, and a measurement standard for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the consolidated financial statements. See Note F.
Treasury stock.
The Company records treasury stock at cost. Treasury stock includes shares purchased from employees for tax withholding purposes related to vesting of restricted stock grants.
Earnings per share
(“EPS”).
The Company computes and reports both basic 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.
In fiscal
2016
,
2015
, and
2014
there were
2,500
,
25,000
, and
5,100
weighted average shares, respectively, that were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive for those years.
The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares in (000s)
|
|
Basic EPS
|
|
|
Effect of dilutive
common stock equivalents
|
|
|
Diluted EPS
|
|
2016
|
|
|
|
|
|
|
Shares
|
|
392,124
|
|
|
2,834
|
|
|
394,958
|
|
Amount
|
|
$
|
2.85
|
|
|
$
|
(0.02
|
)
|
|
$
|
2.83
|
|
2015
|
|
|
|
|
|
|
Shares
|
|
403,034
|
|
|
3,371
|
|
|
406,405
|
|
Amount
|
|
$
|
2.53
|
|
|
$
|
(0.02
|
)
|
|
$
|
2.51
|
|
2014
|
|
|
|
|
|
|
Shares
|
|
413,553
|
|
|
4,524
|
|
|
418,077
|
|
Amount
|
|
$
|
2.24
|
|
|
$
|
(0.03
|
)
|
|
$
|
2.21
|
|
Comprehensive income.
Comprehensive income includes net earnings and components of other comprehensive income (loss), net of tax, consisting of unrealized investment gains or losses.
Recently issued accounting standards.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers (Topic 606)
.
The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue when the customer obtains control of promised goods or services in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. ASU 2014-09 is effective for the Company’s annual and interim reporting periods beginning in fiscal 2018. The Company does not expect the adoption of this new guidance to be material to its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842).
The 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 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. Due to the substantial number of leases that it has, the Company believes this ASU will increase assets and liabilities by the same material amount on its consolidated balance sheet. See Note E for disclosure of the Company's current undiscounted minimum commitments under noncancelable operating leases. The Company does not believe adoption of this ASU will have a significant impact to its consolidated statements of earnings, stockholders’ equity, and cash flows.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting
. ASU 2016-09 provides for changes to accounting for stock compensation including 1) excess tax benefits and tax deficiencies related to share based payment awards will be recognized as income tax benefit or expense in the reporting period in which they occur (previously such amounts were recognized in additional paid-in capital); 2) excess tax benefits will be classified as an operating activity in the statement of cash flows; and 3) the option to elect to estimate forfeitures or account for them when they occur. ASU 2016-09 is effective for the Company beginning in the first quarter of 2017. Upon adoption of ASU 2016-09, the Company plans to account for forfeitures as incurred and expects this adoption along with the retrospective impact on its classification of cash flows between operating and financing activities to be immaterial. The Company believes the impact of recording excess tax benefits in income taxes in its consolidated statement of earnings may be material. The magnitude of such impact is dependent upon the Company’s future stock price in relation to the fair value of awards on grant date and the Company’s future grants of stock-based compensation. See Note F for disclosure of the Company's historical accounting treatment of excess tax benefits.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. ASU 2016-18 requires restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts on the statement of cash flows. The standard also requires companies who report cash and restricted cash separately on the balance sheet to reconcile those amounts to the
statement of cash flows. ASU 2016-18 is effective for the Company's annual and interim reporting periods beginning in fiscal 2018. The Company does not believe adoption of this ASU will have a significant impact to its consolidated financial statements.
Note B: Investments and Restricted Investments
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.
The fair value of the Company’s financial instruments as of
January 28, 2017
and
January 30, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
($000)
|
|
2016
|
|
|
2015
|
|
Cash and cash equivalents
(Level 1)
|
|
$
|
1,111,599
|
|
|
$
|
761,602
|
|
|
|
|
|
|
Investments (
Level 2)
|
|
$
|
1,288
|
|
|
$
|
3,068
|
|
|
|
|
|
|
Restricted cash and cash equivalents
(Level 1)
|
|
$
|
64,581
|
|
|
$
|
67,947
|
|
|
|
|
|
|
Restricted investments
|
|
|
|
|
Level 1
|
|
$
|
—
|
|
|
$
|
3,736
|
|
Level 2
|
|
$
|
3,628
|
|
|
$
|
—
|
|
Restricted investments in government bonds with a fair value of
$3.6 million
at
January 28, 2017
were transferred from Level 1 into Level 2 due to the market for the identical bonds being inactive.
The underlying assets in the Company’s non-qualified deferred compensation program as of
January 28, 2017
and
January 30, 2016
(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)
|
2016
|
|
|
2015
|
|
Level 1
|
$
|
84,933
|
|
|
$
|
73,633
|
|
Level 2
|
15,490
|
|
|
12,440
|
|
Total
|
$
|
100,423
|
|
|
$
|
86,073
|
|
Note C: Stock-Based Compensation
For fiscal
2016
,
2015
, and
2014
, the Company recognized stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
2016
|
|
|
2015
|
|
|
2014
|
|
Restricted stock
|
$
|
38,234
|
|
|
$
|
37,204
|
|
|
$
|
34,729
|
|
Performance awards
|
33,379
|
|
|
31,056
|
|
|
16,003
|
|
ESPP
|
2,941
|
|
|
2,677
|
|
|
2,269
|
|
Total
|
$
|
74,554
|
|
|
$
|
70,937
|
|
|
$
|
53,001
|
|
Capitalized stock-based compensation cost was not significant in any year.
No
stock options were granted during fiscal
2016
,
2015
, and
2014
. At
January 28, 2017
, the Company had
one
active stock-based compensation plan, which is further described in Note H. The Company recognizes expense for ESPP purchase rights equal to the value of the
15%
discount given on the purchase date.
Total stock-based compensation recognized in the Company's Consolidated Statements of Earnings for fiscal
2016
,
2015
, and
2014
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements of Earnings Classification ($000)
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cost of goods sold
|
$
|
34,077
|
|
|
$
|
32,922
|
|
|
$
|
27,088
|
|
Selling, general and administrative
|
40,477
|
|
|
38,015
|
|
|
25,913
|
|
Total
|
$
|
74,554
|
|
|
$
|
70,937
|
|
|
$
|
53,001
|
|
Note D: Debt
Senior notes.
Unsecured senior debt, net of unamortized discounts and debt issuance costs, as of
January 28, 2017
and
January 30, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
($000)
|
|
2016
|
|
|
2015
|
|
6.38% Series A Senior Notes due 2018
|
|
$
|
84,939
|
|
|
$
|
84,906
|
|
6.53% Series B Senior Notes due 2021
|
|
64,902
|
|
|
64,882
|
|
3.375% Senior Notes due 2024
|
|
246,652
|
|
|
246,237
|
|
Total
|
|
$
|
396,493
|
|
|
$
|
396,025
|
|
As of
January 28, 2017
, 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
January 28, 2017
, 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
January 28, 2017
, the Company was in compliance with these covenants.
As of
January 28, 2017
and
January 30, 2016
, total unamortized discount and debt issuance costs were
$3.5 million
and
$4.0 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
$419 million
and
$423 million
as of
January 28, 2017
and
January 30, 2016
, 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.
The following table shows scheduled annual principal payments on Long-term debt:
|
|
|
|
|
|
|
($000)
|
|
|
|
2017
|
|
|
$
|
—
|
|
2018
|
|
|
$
|
85,000
|
|
2019
|
|
|
$
|
—
|
|
2020
|
|
|
$
|
—
|
|
2021
|
|
|
$
|
65,000
|
|
Thereafter
|
|
|
$
|
250,000
|
|
The table below shows the components of interest expense and income for fiscal
2016
,
2015
, and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Interest expense on long-term debt
|
|
$
|
18,573
|
|
|
$
|
18,568
|
|
|
$
|
12,990
|
|
Other interest expense
|
|
1,022
|
|
|
1,252
|
|
|
1,230
|
|
Capitalized interest
|
|
(26
|
)
|
|
(6,530
|
)
|
|
(10,825
|
)
|
Interest income
|
|
(3,081
|
)
|
|
(678
|
)
|
|
(411
|
)
|
Interest expense, net
|
|
$
|
16,488
|
|
|
$
|
12,612
|
|
|
$
|
2,984
|
|
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
January 28, 2017
the Company had
no
borrowings or standby letters of credit outstanding under this facility and the
$600 million
credit facility remains in place and available.
The revolving credit facility is subject to a financial leverage ratio covenant. As of
January 28, 2017
, the Company was in compliance with this covenant.
Standby letters of credit and collateral trust.
The Company uses standby letters of credit outside of its revolving credit facility in addition to a funded trust to collateralize its insurance obligations. As of
January 28, 2017
and
January 30, 2016
, the Company had
$11.6 million
and
$15.3 million
, respectively, in standby letters of credit and
$56.6 million
and
$56.4 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.
The Company had
$26.5 million
and
$32.0 million
in trade letters of credit outstanding at
January 28, 2017
and
January 30, 2016
, respectively.
Note E: Leases
The Company currently leases all but
three
of its store locations with original, non-cancelable terms that in general range from
three
to
ten
years. Store leases typically contain provisions for
three
to
four
renewal options of
five
years each. Most store leases also provide for minimum annual rentals and for payment of certain expenses. In addition, some store leases also have provisions for additional rent based on a percentage of sales.
The Company leases
three
warehouses.
Two
of the warehouses are in Carlisle, Pennsylvania with leases expiring in
2018
and
2019
. 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.
The Company leases approximately
87,000
square feet of office space for its Los Angeles buying office. The lease term for this facility expires in
2017
and contains renewal provisions. In addition, the Company has a ground lease related to its New York buying office.
The aggregate future minimum annual lease payments under leases, including the ground lease related to the New York buying office, in effect at
January 28, 2017
are as follows:
|
|
|
|
|
|
($000)
|
|
Total operating leases
|
|
2017
|
|
$
|
490,936
|
|
2018
|
|
507,976
|
|
2019
|
|
429,178
|
|
2020
|
|
349,362
|
|
2021
|
|
268,224
|
|
Thereafter
|
|
1,450,539
|
|
Total minimum lease payments
|
|
$
|
3,496,215
|
|
Rent expense, including contingent rent and net of sublease income, was
$505.2 million
,
$473.2 million
,
and
$451.9 million
in fiscal
2016
,
2015
, and
2014
, respectively. Contingent rent and sublease income was not significant in any year.
Note F: Taxes on Earnings
The provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
632,872
|
|
|
$
|
497,710
|
|
|
$
|
499,009
|
|
State
|
|
44,333
|
|
|
37,030
|
|
|
36,547
|
|
|
|
677,205
|
|
|
534,740
|
|
|
535,556
|
|
Deferred
|
|
|
|
|
|
|
Federal
|
|
(8,350
|
)
|
|
55,404
|
|
|
23,452
|
|
State
|
|
(353
|
)
|
|
954
|
|
|
1,634
|
|
|
|
(8,703
|
)
|
|
56,358
|
|
|
25,086
|
|
Total
|
|
$
|
668,502
|
|
|
$
|
591,098
|
|
|
$
|
560,642
|
|
In fiscal
2016
,
2015
, and
2014
, the Company realized tax benefits of
$23.3 million
,
$42.4 million
and
$29.8 million
, respectively, related to employee equity programs that were recorded in additional paid-in capital.
The provision for taxes for financial reporting purposes is different from the tax provision computed by applying the statutory federal income tax rate. The differences are reconciled below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Federal income taxes at the statutory rate
|
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
State income taxes (net of federal benefit) and other, net
|
|
2
|
%
|
|
2
|
%
|
|
3
|
%
|
Total
|
|
37
|
%
|
|
37
|
%
|
|
38
|
%
|
The components of deferred taxes at
January 28, 2017
and
January 30, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
($000)
|
|
2016
|
|
|
2015
|
|
Deferred Tax Assets
|
|
|
|
|
Accrued liabilities
|
|
$
|
71,796
|
|
|
$
|
69,144
|
|
Deferred compensation
|
|
36,101
|
|
|
29,932
|
|
Stock-based compensation
|
|
44,865
|
|
|
41,388
|
|
Deferred rent
|
|
25,221
|
|
|
23,903
|
|
State taxes and credits
|
|
28,484
|
|
|
21,973
|
|
Employee benefits
|
|
23,987
|
|
|
22,156
|
|
Other
|
|
8,223
|
|
|
6,835
|
|
Gross Deferred Tax Assets
|
|
238,677
|
|
|
215,331
|
|
Less: Valuation allowance
|
|
(3,730
|
)
|
|
—
|
|
Deferred Tax Assets
|
|
234,947
|
|
|
215,331
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
Depreciation
|
|
(313,526
|
)
|
|
(304,191
|
)
|
Merchandise inventory
|
|
(28,853
|
)
|
|
(28,085
|
)
|
Supplies
|
|
(13,418
|
)
|
|
(12,559
|
)
|
Other
|
|
(535
|
)
|
|
(584
|
)
|
Deferred Tax Liabilities
|
|
(356,332
|
)
|
|
(345,419
|
)
|
Net Deferred Tax Liabilities
|
|
$
|
(121,385
|
)
|
|
$
|
(130,088
|
)
|
At the end of fiscal
2016
and
2015
, the Company's state tax credit carryforwards for income tax purposes were approximately
$22.8 million
and
$16.1 million
, respectively. The state tax credit carryforwards will begin to expire in fiscal
2019
. The Company has provided a valuation allowance of
$3.7 million
for deferred tax assets related to state tax credits that are not expected to be realized.
The changes in amounts of unrecognized tax benefits (gross of federal tax benefits and excluding interest and penalties) at fiscal
2016
,
2015
, and
2014
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Unrecognized tax benefits - beginning of year
|
|
$
|
75,372
|
|
|
$
|
78,116
|
|
|
$
|
80,323
|
|
Gross increases:
|
|
|
|
|
|
|
Tax positions in current period
|
|
12,394
|
|
|
14,990
|
|
|
15,441
|
|
Tax positions in prior period
|
|
2,897
|
|
|
—
|
|
|
—
|
|
Gross decreases:
|
|
|
|
|
|
|
Tax positions in prior periods
|
|
(3,231
|
)
|
|
(10,589
|
)
|
|
(9,432
|
)
|
Lapse of statute limitations
|
|
(6,310
|
)
|
|
(4,216
|
)
|
|
(5,732
|
)
|
Settlements
|
|
—
|
|
|
(2,929
|
)
|
|
(2,484
|
)
|
Unrecognized tax benefits - end of year
|
|
$
|
81,122
|
|
|
$
|
75,372
|
|
|
$
|
78,116
|
|
At the end of fiscal
2016
,
2015
, and
2014
, the reserves for unrecognized tax benefits were
$98.6 million
,
$94.2 million
, and
$101.7 million
inclusive of
$17.5 million
,
$18.8 million
, and
$23.6 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,
$49.1 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 tax assets and liabilities. These amounts are net of federal and state income taxes.
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
$4.3 million
.
The Company is open to audit by the Internal Revenue Service under the statute of limitations for fiscal years
2013
through
2016
. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years
2012
through
2016
. 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.
Note G: Employee Benefit Plans
The Company has a defined contribution plan that is available to certain employees. Under the plan, employee and Company contributions and accumulated plan earnings qualify for favorable tax treatment under Section 401(k) of the Internal Revenue Code. This plan permits employees to make contributions up to the maximum limits allowable under the Internal Revenue Code. The Company matches up to
4%
of the employee’s salary up to the plan limits. Company matching contributions to the 401(k) plan were
$13.9 million
,
$12.7 million
, and
$11.4 million
in fiscal
2016
,
2015
, and
2014
, respectively.
The Company also has an Incentive Compensation Plan which provides cash awards to key management and employees based on Company and individual performance.
The Company also makes available to management a Non-qualified Deferred Compensation Plan which allows management to make payroll contributions on a pre-tax basis in addition to the 401(k) plan. Other long-term assets include
$100.4 million
and
$86.1 million
at
January 28, 2017
and
January 30, 2016
, respectively, of long-term plan investments, at market value, set aside or designated for the Non-qualified Deferred Compensation Plan (See Note B). Plan investments are designated by the participants, and investment returns are not guaranteed by the Company. The Company has a corresponding liability to participants of
$100.4 million
and
$86.1 million
at
January 28, 2017
and
January 30, 2016
, respectively, included in Other long-term liabilities in the Consolidated Balance Sheets.
In addition, the Company has certain individuals who receive or will receive post-employment medical benefits. The estimated liability for these benefits of
$8.0 million
and
$13.2 million
is included in Accrued expenses and other in the accompanying Consolidated Balance Sheets as of
January 28, 2017
and
January 30, 2016
, respectively.
Note H: Stockholders' Equity
Common stock.
In February 2017, the Company’s Board of Directors approved a new
two
-year
$1.75 billion
stock repurchase program through fiscal 2018.
The following table summarizes the Company’s stock repurchase activity in fiscal
2016
,
2015
, and
2014
:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Shares repurchased (in millions)
|
|
|
Average repurchase price
|
|
Repurchased
(in millions)
|
2016
|
|
11.6
|
|
|
$60.15
|
|
$700
|
2015
|
|
13.7
|
|
|
$51.27
|
|
$700
|
2014
|
|
14.8
|
|
|
$37.15
|
|
$550
|
Preferred stock.
The Company has
four million
shares of preferred stock authorized, with a par value of
$.01
per share.
No
preferred stock is issued or outstanding.
Dividends.
On
February 28, 2017
, the Company’s Board of Directors declared a quarterly cash dividend of
$0.1600
per common share, payable on
March 31, 2017
. The Company’s Board of Directors declared cash dividends of
$0.1350
per common share in March, May, August, and November
2016
, cash dividends of
$0.1175
per common share in February, May, August, and November
2015
, and cash dividends of
$0.1000
per common share in February, May, August, and November
2014
.
2008 Equity Incentive Plan.
The Ross Stores, Inc. 2008 Equity Incentive Plan (the “2008 Plan”) has an initial share reserve of
33.0 million
shares of the Company’s common stock, of which
24.0 million
shares can be issued as full value awards. The 2008 Plan provides for various types of incentive awards, which may potentially include the grant of stock options, stock appreciation rights, restricted stock purchase rights, restricted stock bonuses, restricted stock
units, performance shares, performance units, and deferred compensation awards. As of
January 28, 2017
, there were
12.1 million
shares that remained available for grant under the 2008 Plan.
A summary of the stock option activity for fiscal
2016
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
|
Weighted
average
exercise price
|
|
|
Weighted average remaining contractual term
|
|
Aggregate
intrinsic value ($000)
|
Outstanding at January 30, 2016
|
|
310,066
|
|
|
$7.34
|
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
|
(261,502
|
)
|
|
7.18
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding at January 28, 2017, all vested
|
|
48,564
|
|
|
$8.19
|
|
0.32
|
|
$2,775
|
As of
January 28, 2017
, the outstanding and exercisable options to purchase
48,564
shares of common stock had a weighted average exercise price of
$8.19
and a weighted average remaining contractual life of
0.32
years.
A summary of restricted stock and performance share award activity for fiscal
2016
is presented below:
|
|
|
|
|
|
|
|
|
|
Number of
shares (000)
|
|
|
Weighted
average
grant date
fair value
|
|
Unvested at January 30, 2016
|
|
6,104
|
|
|
$34.87
|
Awarded
|
|
1,537
|
|
|
57.08
|
|
Released
|
|
(1,916
|
)
|
|
27.82
|
|
Forfeited
|
|
(162
|
)
|
|
38.14
|
|
Unvested at January 28, 2017
|
|
5,563
|
|
|
$43.19
|
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. The unamortized compensation expense at
January 28, 2017
and
January 30, 2016
was
$101.6 million
and
$94.5 million
, respectively, which is expected to be recognized over a weighted average remaining period of
1.8
years. Intrinsic value for restricted stock, defined as the closing market value on the last business day of fiscal year
2016
(or
$65.33
), was
$363.4 million
. A total of
12.1 million
,
12.7 million
, and
13.3 million
shares were available for new restricted stock awards at the end of fiscal
2016
,
2015
, and
2014
, respectively. During fiscal
2016
,
2015
, and
2014
, shares purchased by the Company for tax withholding totaled
0.7 million
,
1.3 million
, and
1.1 million
shares, respectively, and are considered treasury shares which are available for reissuance. As of
January 28, 2017
and
January 30, 2016
, the Company held
11.8 million
and
11.1 million
shares of treasury stock, respectively.
Performance share awards.
The Company has a performance share award program for senior executives. A performance share award represents a right to receive shares of restricted stock 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 is deferred generally for
one
year from the date earned. The Company issued approximately
682,000
,
601,000
, and
607,000
shares in settlement of the fiscal
2016
,
2015
, and
2014
awards.
Employee Stock Purchase Plan.
Under the Employee Stock Purchase Plan (“ESPP”), eligible employees participating in the quarterly offering period can choose to have up to the lesser of
10%
of their annual base earnings or the IRS annual share purchase limit of
$25,000
in aggregate market value to purchase the Company’s common stock. The purchase price of the stock is
85%
of the closing market price on the date of purchase. Purchases occur on a quarterly basis (on the last trading day of each calendar quarter). The Company recognizes expense for ESPP purchase rights equal to the value of the
15%
discount given on the purchase date.
During fiscal
2016
,
2015
, and
2014
, employees purchased approximately
0.3 million
,
0.4 million
, and
0.4 million
shares, respectively, of the Company’s common stock under the plan at weighted average per share prices of
$51.86
,
$43.16
,
and
$32.18
, respectively. Through
January 28, 2017
, approximately
39.4 million
shares had been issued under this plan and
5.6 million
shares remained available for future issuance.
Note I: Related Party Transactions
The Company has a consulting agreement with Norman Ferber, its Chairman Emeritus of the Board of Directors, under which the Company pays him an annual consulting fee of
$1.5 million
through
May 2018
. In addition, the agreement provides for administrative support and health and other benefits for him and his dependents, which totaled approximately
$0.4 million
,
$0.3 million
, and
$0.3 million
in fiscal
2016
,
2015
, and
2014
, respectively, along with amounts to cover premiums through
May 2018
on a life insurance policy with a death benefit of
$2.0 million
. On termination of Mr. Ferber’s consultancy with the Company, the Company will pay Mr. Ferber
$75,000
per year for a period of
10
years.
Robert Ferber, the son of Norman Ferber, is a buyer with the Company. The Company paid Robert Ferber compensation including salary and bonus of approximately
$148,000
,
$131,000
, and
$133,000
in fiscal
2016
,
2015
, and
2014
, respectively.
Note J: 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
January 28, 2017
.
The Company is also party to various other legal and regulatory proceedings arising in the normal course of business. Actions filed against the Company may include commercial, product and product safety, consumer, intellectual property, 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.
Note K: Quarterly Financial Data (Unaudited)
Summarized quarterly financial information for fiscal
2016
and
2015
is presented in the tables below.
Year ended
January 28, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
($000, except per share data)
|
|
April 30, 2016
|
|
|
July 30, 2016
|
|
|
October 29, 2016
|
|
|
January 28, 2017
|
|
Sales
|
|
$
|
3,088,995
|
|
|
$
|
3,180,917
|
|
|
$
|
3,086,687
|
|
|
$
|
3,510,158
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
2,176,205
|
|
|
2,251,845
|
|
|
2,206,092
|
|
|
2,539,563
|
|
|
Selling, general and administrative
|
|
436,924
|
|
|
469,511
|
|
|
490,171
|
|
|
493,802
|
|
|
Interest expense, net
|
|
4,364
|
|
|
4,213
|
|
|
4,156
|
|
|
3,755
|
|
|
Total costs and expenses
|
|
2,617,493
|
|
|
2,725,569
|
|
|
2,700,419
|
|
|
3,037,120
|
|
|
Earnings before taxes
|
|
471,502
|
|
|
455,348
|
|
|
386,268
|
|
|
473,038
|
|
|
Provision for taxes on earnings
|
|
180,868
|
|
|
173,442
|
|
|
141,722
|
|
|
172,470
|
|
|
Net earnings
|
|
$
|
290,634
|
|
|
$
|
281,906
|
|
|
$
|
244,546
|
|
|
$
|
300,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share – basic
1
|
|
$
|
0.73
|
|
|
$
|
0.72
|
|
|
$
|
0.63
|
|
|
$
|
0.77
|
|
|
Earnings per share – diluted
1
|
|
$
|
0.73
|
|
|
$
|
0.71
|
|
|
$
|
0.62
|
|
|
$
|
0.77
|
|
|
Cash dividends declared per share
|
|
|
|
|
|
|
|
|
|
on common stock
|
|
$
|
0.1350
|
|
|
$
|
0.1350
|
|
|
$
|
0.1350
|
|
|
$
|
0.1350
|
|
|
Stock price
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
59.30
|
|
|
$
|
61.98
|
|
|
$
|
65.06
|
|
|
$
|
69.53
|
|
|
Low
|
|
$
|
52.56
|
|
|
$
|
52.34
|
|
|
$
|
60.68
|
|
|
$
|
61.28
|
|
|
1
EPS is computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of changes in average quarterly shares outstanding.
Year ended
January 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
($000, except per share data)
|
|
May 2, 2015
|
|
|
August 1, 2015
|
|
|
October 31, 2015
|
|
|
January 30, 2016
|
|
|
Sales
|
|
$
|
2,938,148
|
|
|
$
|
2,968,270
|
|
|
$
|
2,782,855
|
|
|
$
|
3,250,726
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
2,067,455
|
|
|
2,119,480
|
|
|
2,003,347
|
|
|
2,386,591
|
|
|
Selling, general and administrative
|
|
409,298
|
|
|
435,226
|
|
|
443,354
|
|
|
450,877
|
|
|
Interest expense, net
|
|
2,003
|
|
|
1,652
|
|
|
4,427
|
|
|
4,530
|
|
|
Total costs and expenses
|
|
2,478,756
|
|
|
2,556,358
|
|
|
2,451,128
|
|
|
2,841,998
|
|
|
Earnings before taxes
|
|
459,392
|
|
|
411,912
|
|
|
331,727
|
|
|
408,728
|
|
|
Provision for taxes on earnings
|
|
177,187
|
|
|
153,273
|
|
|
116,071
|
|
|
144,567
|
|
|
Net earnings
|
|
$
|
282,205
|
|
|
$
|
258,639
|
|
|
$
|
215,656
|
|
|
$
|
264,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share – basic
1,2
|
|
$
|
0.69
|
|
|
$
|
0.64
|
|
|
$
|
0.54
|
|
|
$
|
0.66
|
|
|
Earnings per share – diluted
1,2
|
|
$
|
0.69
|
|
|
$
|
0.63
|
|
|
$
|
0.53
|
|
|
$
|
0.66
|
|
|
Cash dividends declared per share
|
|
|
|
|
|
|
|
|
|
on common stock
2
|
|
$
|
0.1175
|
|
|
$
|
0.1175
|
|
|
$
|
0.1175
|
|
|
$
|
0.1175
|
|
|
Stock price
2
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
53.73
|
|
|
$
|
53.28
|
|
|
$
|
56.53
|
|
|
$
|
56.26
|
|
|
Low
|
|
$
|
45.93
|
|
|
$
|
47.79
|
|
|
$
|
47.22
|
|
|
$
|
44.81
|
|
|
1
EPS is computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of changes in average quarterly shares outstanding.
2
All per share amounts have been adjusted for the
two
-for-one stock split effective June 11, 2015.