ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Earnings
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Three Months Ended
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Six Months Ended
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($000, except stores and per share data, unaudited)
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August 4, 2018
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July 29, 2017
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August 4, 2018
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July 29, 2017
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Sales
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$
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3,737,926
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|
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$
|
3,431,603
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|
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$
|
7,326,545
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$
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6,738,032
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Costs and Expenses
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Cost of goods sold
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2,666,983
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2,420,942
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5,189,202
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4,750,908
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Selling, general and administrative
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554,581
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498,276
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1,079,004
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973,095
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Interest (income) expense, net
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(1,393
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)
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2,341
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(1,896
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)
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5,510
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Total costs and expenses
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3,220,171
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2,921,559
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6,266,310
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5,729,513
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Earnings before taxes
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517,755
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510,044
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1,060,235
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1,008,519
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Provision for taxes on earnings
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128,351
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193,505
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252,579
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|
370,962
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Net earnings
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$
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389,404
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$
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316,539
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$
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807,656
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$
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637,557
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Earnings per share
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Basic
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$
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1.05
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$
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0.83
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$
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2.17
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$
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1.66
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Diluted
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$
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1.04
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$
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0.82
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$
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2.15
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$
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1.64
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Weighted average shares outstanding (000)
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Basic
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371,031
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383,011
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372,414
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384,722
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Diluted
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373,717
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385,571
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375,336
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387,657
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Dividends
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Cash dividends declared per share
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$
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0.225
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$
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0.160
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$
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0.450
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$
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0.320
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Stores open at end of period
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1,680
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1,589
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1,680
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1,589
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Comprehensive Income
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Three Months Ended
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Six Months Ended
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($000, unaudited)
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August 4, 2018
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July 29, 2017
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August 4, 2018
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July 29, 2017
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Net earnings
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$
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389,404
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$
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316,539
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$
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807,656
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$
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637,557
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Other comprehensive (loss) income:
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Change in unrealized loss on investments, net of tax
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(3
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)
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(16
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)
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(23
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)
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(32
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)
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Comprehensive income
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$
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389,401
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$
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316,523
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$
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807,633
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$
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637,525
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Balance Sheets
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($000, except share data, unaudited)
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August 4, 2018
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February 3, 2018
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July 29, 2017
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Assets
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Current Assets
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Cash and cash equivalents
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$
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1,386,935
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$
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1,290,294
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$
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1,150,932
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Short-term investments
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—
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512
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—
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Accounts receivable
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121,508
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87,868
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103,359
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Merchandise inventory
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1,698,390
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1,641,735
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1,608,333
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Prepaid expenses and other
|
172,822
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130,748
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141,793
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Total current assets
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3,379,655
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3,151,157
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3,004,417
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Property and Equipment
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Land and buildings
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1,117,895
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1,109,173
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1,106,845
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Fixtures and equipment
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2,660,388
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2,603,318
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2,483,550
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Leasehold improvements
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1,117,648
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1,093,634
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1,029,457
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Construction-in-progress
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142,708
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102,054
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95,324
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5,038,639
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4,908,179
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4,715,176
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Less accumulated depreciation and amortization
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2,654,338
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2,525,715
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2,388,063
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Property and equipment, net
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2,384,301
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2,382,464
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2,327,113
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Long-term investments
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709
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712
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1,259
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Other long-term assets
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199,091
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187,718
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181,690
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Total assets
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$
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5,963,756
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$
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5,722,051
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$
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5,514,479
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Liabilities and Stockholders’ Equity
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Current Liabilities
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Accounts payable
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$
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1,184,422
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$
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1,059,844
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$
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1,172,847
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Accrued expenses and other
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427,875
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431,706
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411,083
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Accrued payroll and benefits
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280,861
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349,879
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245,031
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Current portion of long-term debt
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84,989
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84,973
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—
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Total current liabilities
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1,978,147
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1,926,402
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1,828,961
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Long-term debt
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312,217
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311,994
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396,729
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Other long-term liabilities
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374,587
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348,541
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319,770
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Deferred income taxes
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114,195
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85,806
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129,135
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Commitments and contingencies
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Stockholders’ Equity
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Common stock, par value $.01 per share
Authorized 1,000,000,000 shares
Issued and outstanding 373,868,000, 379,618,000
and 385,923,000 shares, respectively
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3,739
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3,796
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3,859
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Additional paid-in capital
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1,333,329
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1,292,364
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1,253,724
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Treasury stock
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(369,340
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)
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(318,279
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)
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(316,002
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)
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Accumulated other comprehensive income
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4
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27
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|
59
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Retained earnings
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2,216,878
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2,071,400
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1,898,244
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Total stockholders’ equity
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3,184,610
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3,049,308
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2,839,884
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Total liabilities and stockholders’ equity
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$
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5,963,756
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$
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5,722,051
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$
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5,514,479
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
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Six Months Ended
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($000, unaudited)
|
August 4, 2018
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July 29, 2017
1
|
Cash Flows From Operating Activities
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Net earnings
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$
|
807,656
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$
|
637,557
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Adjustments to reconcile net earnings to net cash provided
by operating activities:
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Depreciation and amortization
|
162,403
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|
150,905
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Stock-based compensation
|
47,580
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42,719
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Deferred income taxes
|
21,664
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|
8,426
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|
Change in assets and liabilities:
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Merchandise inventory
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(56,654
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)
|
|
(95,447
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)
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Other current assets
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(75,762
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)
|
|
(56,520
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)
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Accounts payable
|
122,008
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|
154,828
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|
Other current liabilities
|
(29,348
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)
|
|
(59,104
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)
|
Other long-term, net
|
14,637
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|
|
14,595
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Net cash provided by operating activities
|
1,014,184
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|
797,959
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|
|
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Cash Flows From Investing Activities
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|
|
|
Additions to property and equipment
|
(178,635
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)
|
|
(169,316
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)
|
Proceeds from investments
|
505
|
|
|
—
|
|
Net cash used in investing activities
|
(178,130
|
)
|
|
(169,316
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)
|
|
|
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Cash Flows From Financing Activities
|
|
|
|
Issuance of common stock related to stock plans
|
9,817
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|
9,157
|
|
Treasury stock purchased
|
(51,061
|
)
|
|
(43,163
|
)
|
Repurchase of common stock
|
(528,580
|
)
|
|
(430,085
|
)
|
Dividends paid
|
(169,971
|
)
|
|
(124,962
|
)
|
Net cash used in financing activities
|
(739,795
|
)
|
|
(589,053
|
)
|
|
|
|
|
Net increase in cash, cash equivalents, and restricted cash and cash equivalents
|
96,259
|
|
|
39,590
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|
|
|
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Cash, cash equivalents, and restricted cash and cash equivalents:
|
|
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|
Beginning of period
1
|
1,353,272
|
|
|
1,176,180
|
|
End of period
|
$
|
1,449,531
|
|
|
$
|
1,215,770
|
|
|
|
|
|
Supplemental Cash Flow Disclosures
|
|
|
|
Interest paid
|
$
|
9,053
|
|
|
$
|
9,053
|
|
Income taxes paid
|
$
|
232,528
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|
|
$
|
379,154
|
|
1
As the result of the adoption of ASU 2016-18,
Statement of Cash Flow (Topic 230): Restricted Cash
, the prior year amounts were retrospectively adjusted to include restricted cash and cash equivalents. See Note A.
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
Three and Six Months Ended
August 4, 2018
and
July 29, 2017
(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
August 4, 2018
and
July 29, 2017
, the results of operations and comprehensive income for the
three and six
month periods ended
August 4, 2018
and
July 29, 2017
, and cash flows for the
six month periods
ended
August 4, 2018
and
July 29, 2017
. The Condensed Consolidated Balance Sheet as of
February 3, 2018
, presented herein, has been derived from the Company’s audited consolidated financial statements for the fiscal year then ended.
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
February 3, 2018
.
The results of operations and comprehensive income for the
three and six
month periods ended
August 4, 2018
and
July 29, 2017
presented herein are not necessarily indicative of the results to be expected for the full fiscal year.
Recently adopted accounting standards.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers
(Accounting Standards Codification "ASC" 606) which, along with subsequent amendments, supersedes the revenue recognition requirements in “Revenue Recognition (ASC 605).” This guidance provides a five-step analysis of transactions to determine when and how revenue is recognized and requires entities to recognize revenue when the customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The Company adopted ASC 606 as of February 4, 2018, using the modified retrospective method. Results for reporting periods beginning on or after February 4, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with ASC 605. Upon adoption of ASC 606, the Company recorded a cumulative-effect adjustment to increase beginning retained earnings by
$20 million
as of February 4, 2018, primarily due to the change in the timing of the recognition of stored value card breakage. The impact of applying ASC 606 was not material to the Company's condensed consolidated financial statements for the
three and six
month periods ended
August 4, 2018
.
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. The Company adopted ASU 2016-18 as of February 4, 2018, using the retrospective method.
Significant accounting policies.
Except for the updates to accounting policies for revenue recognition and allowance for sales returns as a result of adopting ASC 606 described below, there have been no significant changes to the accounting policies followed by the Company as described in Note A to the audited consolidated financial statements for the fiscal year ended February 3, 2018.
Revenue recognition.
The Company recognizes revenue at the point of sale, net of sales taxes collected and an allowance for estimated future returns. Sales taxes collected that are outstanding and the allowance for estimated future returns are included in Accrued expenses and other in the Condensed Consolidated Balance Sheets.
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. As a result of adopting ASC 606, breakage is estimated and recognized as revenue based upon the historical pattern of customer redemptions. In prior periods, breakage was recorded as a reduction of operating expense when customer redemption was considered remote. Breakage was not material to the condensed consolidated financial statements for the
three and six
month periods ended
August 4, 2018
and
July 29, 2017
.
The following sales mix table disaggregates revenue by merchandise category for the
three and six
month periods ended
August 4, 2018
and
July 29, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
August 4, 2018
|
|
|
July 29, 2017
|
|
|
August 4, 2018
|
|
|
July 29, 2017
|
|
Ladies
|
28
|
%
|
|
29
|
%
|
|
28
|
%
|
|
29
|
%
|
Home Accents and Bed and Bath
|
24
|
%
|
|
24
|
%
|
|
24
|
%
|
|
24
|
%
|
Shoes
|
14
|
%
|
|
14
|
%
|
|
14
|
%
|
|
14
|
%
|
Men's
|
14
|
%
|
|
14
|
%
|
|
13
|
%
|
|
13
|
%
|
Accessories, Lingerie, Fine Jewelry, and Fragrances
|
12
|
%
|
|
12
|
%
|
|
13
|
%
|
|
12
|
%
|
Children's
|
8
|
%
|
|
7
|
%
|
|
8
|
%
|
|
8
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Allowance for sales returns.
As a result of the adoption of ASC 606, the Company recognizes allowances for estimated sales returns on a gross basis. This results in (i) an asset recorded for the expected recovery of merchandise inventory and a liability recorded for the refund due to the customer and (ii) a change in sales and related cost of goods sold based on the required reserve for estimated returns. Prior to the adoption of ASC 606, the Company recognized allowances for sales returns on a net basis.
Cash, restricted cash, and restricted investments.
Restricted cash, cash equivalents, and investments 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 classification between current and long-term is based on the timing of expected payments of the insurance obligations.
The following table provides a reconciliation of cash, cash equivalents, restricted cash and equivalents in the Condensed Consolidated Balance Sheets that reconcile to the amounts shown on the Condensed Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
August 4, 2018
|
|
|
February 3, 2018
|
|
|
July 29, 2017
|
|
Cash and cash equivalents
|
$
|
1,386,935
|
|
|
$
|
1,290,294
|
|
|
$
|
1,150,932
|
|
Restricted cash and cash equivalents included in:
|
|
|
|
|
|
Prepaid expenses and other
|
8,961
|
|
|
9,412
|
|
|
12,990
|
|
Other long-term assets
|
53,635
|
|
|
53,566
|
|
|
51,848
|
|
Total restricted cash and cash equivalents
|
62,596
|
|
|
62,978
|
|
|
64,838
|
|
Total cash, cash equivalents and restricted cash and equivalents
|
$
|
1,449,531
|
|
|
$
|
1,353,272
|
|
|
$
|
1,215,770
|
|
In addition to the restricted cash and equivalents in the table above, the Company had restricted investments included in the Condensed Consolidated Balance Sheets as shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
August 4, 2018
|
|
|
February 3, 2018
|
|
|
July 29, 2017
|
|
Prepaid expenses and other
|
$
|
2,812
|
|
|
$
|
2,435
|
|
|
$
|
693
|
|
Other long-term assets
|
—
|
|
|
403
|
|
|
2,884
|
|
Total restricted investments
|
$
|
2,812
|
|
|
$
|
2,838
|
|
|
$
|
3,577
|
|
Property and equipment.
As of
August 4, 2018
and
July 29, 2017
, the Company had
$10.0 million
and
$6.5 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
$0.225
per common share in March and May 2018 and
$0.160
per common share in February, May, August, and November 2017, respectively.
In
August 2018
, the Company’s Board of Directors declared a cash dividend of
$0.225
per common share, payable on
September 28, 2018
.
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/employment laws and consumer protection laws. Class action litigation remains pending as of
August 4, 2018
.
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.
Recently issued accounting standards.
The Company considers the applicability and impact of all ASUs issued by the FASB. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company's condensed consolidated financial results.
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 working on the adoption, and 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 a material amount on its consolidated balance sheet. The Company’s current undiscounted minimum commitments under noncancelable operating leases is approximately
$3.8 billion
. 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.
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 and six
month periods ended
August 4, 2018
. The fair value of the Company’s financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
|
August 4, 2018
|
|
|
February 3, 2018
|
|
|
July 29, 2017
|
|
Cash and cash equivalents (
Level 1)
|
|
$
|
1,386,935
|
|
|
$
|
1,290,294
|
|
|
$
|
1,150,932
|
|
|
|
|
|
|
|
|
Restricted cash and cash equivalents
(Level 1)
|
|
$
|
62,596
|
|
|
$
|
62,978
|
|
|
$
|
64,838
|
|
|
|
|
|
|
|
|
Investments
(Level 2)
|
|
$
|
709
|
|
|
$
|
1,224
|
|
|
$
|
1,259
|
|
|
|
|
|
|
|
|
Restricted investments
(Level 2)
|
|
$
|
2,812
|
|
|
$
|
2,838
|
|
|
$
|
3,577
|
|
The underlying assets in the Company’s non-qualified deferred compensation program as of
August 4, 2018
,
February 3, 2018
, and
July 29, 2017
(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)
|
August 4, 2018
|
|
|
February 3, 2018
|
|
|
July 29, 2017
|
|
Level 1
|
$
|
117,274
|
|
|
$
|
104,590
|
|
|
$
|
97,282
|
|
Level 2
|
11,836
|
|
|
16,023
|
|
|
17,429
|
|
Total
|
$
|
129,110
|
|
|
$
|
120,613
|
|
|
$
|
114,711
|
|
Note C: Stock-Based Compensation
Stock-based compensation.
For the
three and six
month periods ended
August 4, 2018
and
July 29, 2017
, the Company recognized stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
($000)
|
August 4, 2018
|
|
|
July 29, 2017
|
|
|
|
August 4, 2018
|
|
|
July 29, 2017
|
|
Restricted stock
|
$
|
12,428
|
|
|
$
|
11,019
|
|
|
|
$
|
23,936
|
|
|
$
|
21,720
|
|
Performance awards
|
10,487
|
|
|
10,670
|
|
|
|
21,911
|
|
|
19,453
|
|
Employee stock purchase plan
|
905
|
|
|
792
|
|
|
|
1,733
|
|
|
1,546
|
|
Total
|
$
|
23,820
|
|
|
$
|
22,481
|
|
|
|
$
|
47,580
|
|
|
$
|
42,719
|
|
Total stock-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Earnings for the
three and six
month periods ended
August 4, 2018
and
July 29, 2017
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
Statements of Earnings Classification ($000)
|
August 4, 2018
|
|
|
July 29, 2017
|
|
|
|
August 4, 2018
|
|
|
July 29, 2017
|
|
Cost of goods sold
|
$
|
11,011
|
|
|
$
|
10,316
|
|
|
|
$
|
22,047
|
|
|
$
|
20,111
|
|
Selling, general and administrative
|
12,809
|
|
|
12,165
|
|
|
|
25,533
|
|
|
22,608
|
|
Total
|
$
|
23,820
|
|
|
$
|
22,481
|
|
|
|
$
|
47,580
|
|
|
$
|
42,719
|
|
The tax benefits related to stock-based compensation expense for the
three and six
month periods ended
August 4, 2018
were
$5.0 million
and
$9.9 million
, respectively. The tax benefits related to stock-based compensation expense for the
three and six
month periods ended
July 29, 2017
were
$7.8 million
and
$14.8 million
, respectively.
Restricted stock awards.
The Company grants shares of restricted stock to directors, officers, and key employees. The market value of shares of restricted stock at the date of grant is amortized to expense over the vesting period of generally
three
to
five
years.
During the
three and six
month periods ended
August 4, 2018
and
July 29, 2017
, shares purchased by the Company for tax withholding totaled
78,151
and
661,379
, and
69,934
and
646,747
, respectively, and are considered treasury shares which are available for reissuance.
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 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 then vests over a service period, generally
two
to
three
years from the date the performance award was granted.
As of
August 4, 2018
, shares related to unvested restricted stock and performance share awards totaled
4.9 million
shares. A summary of restricted stock and performance share award activity for the
six
month period ended
August 4, 2018
, is presented below:
|
|
|
|
|
|
|
|
(000, except per share data)
|
Number of
shares
|
|
|
Weighted
average
grant date
fair value
|
|
Unvested at February 3, 2018
|
5,483
|
|
|
$
|
51.19
|
|
Awarded
|
1,114
|
|
|
74.88
|
|
Released
|
(1,679
|
)
|
|
44.11
|
|
Forfeited
|
(56
|
)
|
|
59.21
|
|
Unvested at August 4, 2018
|
4,862
|
|
|
$
|
60.22
|
|
The unamortized compensation expense at
August 4, 2018
, was
$148.3 million
, which is expected to be recognized over a weighted-average remaining period of
2.2
years. The unamortized compensation expense at
July 29, 2017
, was
$133.6 million
, which was expected to be recognized over a weighted-average remaining period of
2.2
years.
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.
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.
For the three month period ended
August 4, 2018
,
no
weighted average shares were excluded from the calculation of diluted EPS because none would have been anti-dilutive for the period presented. For the six month period ended
August 4, 2018
, approximately
730
weighted average shares were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive for the period presented. For the
three and six
month periods ended
July 29, 2017
, approximately
650,500
and
462,900
weighted average shares were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive for the periods presented.
The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
Shares in (000s)
|
Basic EPS
|
|
|
Effect of
dilutive
common stock
equivalents
|
|
|
Diluted
EPS
|
|
|
|
Basic EPS
|
|
|
Effect of
dilutive
common
stock
equivalents
|
|
|
Diluted
EPS
|
|
August 4, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
371,031
|
|
|
2,686
|
|
|
373,717
|
|
|
|
372,414
|
|
|
2,922
|
|
|
375,336
|
|
Amount
|
$
|
1.05
|
|
|
$
|
(0.01
|
)
|
|
$
|
1.04
|
|
|
|
$
|
2.17
|
|
|
$
|
(0.02
|
)
|
|
$
|
2.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 29, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
383,011
|
|
|
2,560
|
|
|
385,571
|
|
|
|
384,722
|
|
|
2,935
|
|
|
387,657
|
|
Amount
|
$
|
0.83
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.82
|
|
|
|
$
|
1.66
|
|
|
$
|
(0.02
|
)
|
|
$
|
1.64
|
|
Note E: Debt
Senior notes.
Unsecured senior debt, net of unamortized discounts and debt issuance costs, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
|
August 4, 2018
|
|
|
February 3, 2018
|
|
|
July 29, 2017
|
|
6.38% Series A Senior Notes due 2018
|
|
$
|
84,989
|
|
|
$
|
84,973
|
|
|
$
|
84,956
|
|
6.53% Series B Senior Notes due 2021
|
|
64,933
|
|
|
64,922
|
|
|
64,912
|
|
3.375% Senior Notes due 2024
|
|
247,284
|
|
|
247,072
|
|
|
246,861
|
|
Total long-term debt
|
|
$
|
397,206
|
|
|
$
|
396,967
|
|
|
$
|
396,729
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
84,989
|
|
|
84,973
|
|
|
—
|
|
Total due beyond one year
|
|
$
|
312,217
|
|
|
$
|
311,994
|
|
|
$
|
396,729
|
|
As of
August 4, 2018
, 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
August 4, 2018
, 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
6.38%
. The Series B notes totaling
$65 million
are due in
December 2021
, and bear interest at
6.53%
. Borrowings under these senior notes are subject to certain financial covenants, including interest coverage and other financial ratios. As of
August 4, 2018
, the Company was in compliance with these covenants.
As of
August 4, 2018
,
February 3, 2018
, and
July 29, 2017
, total unamortized discount and debt issuance costs were
$2.8 million
,
$3.0 million
, and
$3.3 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
$403 million
,
$411 million
, and
$421 million
as of
August 4, 2018
,
February 3, 2018
, and
July 29, 2017
, 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 table below shows the components of interest expense and income for the
three and six
month periods ended
August 4, 2018
and
July 29, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
($000)
|
August 4, 2018
|
|
|
July 29, 2017
|
|
|
|
August 4, 2018
|
|
|
July 29, 2017
|
|
Interest expense on long-term debt
|
$
|
4,646
|
|
|
$
|
4,644
|
|
|
|
$
|
9,291
|
|
|
$
|
9,288
|
|
Other interest expense
|
233
|
|
|
233
|
|
|
|
535
|
|
|
502
|
|
Capitalized interest
|
(634
|
)
|
|
(120
|
)
|
|
|
(1,132
|
)
|
|
(182
|
)
|
Interest income
|
(5,638
|
)
|
|
(2,416
|
)
|
|
|
(10,590
|
)
|
|
(4,098
|
)
|
Interest (income) expense, net
|
$
|
(1,393
|
)
|
|
$
|
2,341
|
|
|
|
$
|
(1,896
|
)
|
|
$
|
5,510
|
|
Revolving credit facility.
The Company’s
$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. As of
August 4, 2018
, 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
August 4, 2018
, the Company was in compliance with this covenant.
Note F: Taxes on Earnings
The Tax Cuts and Jobs Act (the “Tax Act” or "tax reform") was signed into law on December 22, 2017. The Tax Act made significant changes to U.S. corporate taxation, including reducing the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. For the
three and six month periods
ended
August 4, 2018
, the Company’s provision for taxes on earnings differed from the Company’s federal corporate income tax rate of 21%, primarily because of the effects of state and local taxes, the net tax benefit associated with share-based compensation, and resolution of tax positions with taxing authorities.
These items resulted in an effective tax rate for the
three and six month periods
ended
August 4, 2018
of
25%
and
24%
as compared to
38%
and
37%
for the
three and six month periods
ended
July 29, 2017
.
Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which provides guidance on accounting for the impact of the Tax Act. As permitted by SAB 118, the Company recorded provisional amounts for both current and deferred income taxes related to the reduced U.S. federal corporate income tax rate in fiscal 2017. The recorded provisional amounts totaling
$80.1 million
of tax benefit, reflect assumptions made based upon the Company’s current interpretation of the Tax Act, and may change as the Company receives additional clarification and guidance in the form of technical corrections to the Tax Act or regulations issued by the U.S. Treasury. As of
August 4, 2018
, the Company has not recorded any adjustment to the provisional amounts recorded in fiscal 2017.
As of
August 4, 2018
,
February 3, 2018
, and
July 29, 2017
, the reserves for unrecognized tax benefits were
$130.8 million
,
$121.3 million
, and
$108.1 million
inclusive of
$25.4 million
,
$22.6 million
, and
$20.1 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,
$88.4 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.
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 by up to
$8.6 million
.
The Company is open to audit by the Internal Revenue Service under the statute of limitations for fiscal years
2013
through
2017
. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years
2013
through
2017
. 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.:
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheets of Ross Stores, Inc. and subsidiaries (the “Company”) as of
August 4, 2018
and
July 29, 2017
, the related condensed consolidated statements of earnings, comprehensive income for the
three and six month periods
ended
August 4, 2018
and
July 29, 2017
, and of cash flows for the
six month periods
ended
August 4, 2018
and
July 29, 2017
, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial information for it 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) (PCAOB), the consolidated balance sheet of the Company as of
February 3, 2018
, 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
April 3, 2018
, 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
February 3, 2018
is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. 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 PCAOB, 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.
/s/ Deloitte & Touche LLP
San Francisco, California
September 12, 2018
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
2017
. 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
2017
. 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
1,453
locations in
38 states, the District of Columbia and Guam
as of
August 4, 2018
. 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
227
dd’s DISCOUNTS stores in
18 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.
Results of Operations
The following table summarizes the financial results for the
three and six month
periods
ended
August 4, 2018
and
July 29, 2017
:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
August 4, 2018
|
|
|
July 29, 2017
|
|
|
|
August 4, 2018
|
|
|
July 29, 2017
|
|
Sales
|
|
|
|
|
|
|
|
|
Sales (millions)
|
$
|
3,738
|
|
|
$
|
3,432
|
|
|
|
$
|
7,327
|
|
|
$
|
6,738
|
|
Sales growth
|
8.9
|
%
|
|
7.9
|
%
|
|
|
8.7
|
%
|
|
7.5
|
%
|
Comparable store sales growth
|
5
|
%
|
|
4
|
%
|
|
|
4
|
%
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
Costs and expenses (as a percent of sales)
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
71.3
|
%
|
|
70.5
|
%
|
|
|
70.8
|
%
|
|
70.5
|
%
|
Selling, general and administrative
|
14.8
|
%
|
|
14.5
|
%
|
|
|
14.7
|
%
|
|
14.4
|
%
|
Interest (income) expense, net
|
(0.0
|
%)
|
|
0.1
|
%
|
|
|
(0.0
|
%)
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
Earnings before taxes (as a percent of sales)
|
13.9
|
%
|
|
14.9
|
%
|
|
|
14.5
|
%
|
|
15.0
|
%
|
|
|
|
|
|
|
|
|
|
Net earnings (as a percent of sales)
|
10.4
|
%
|
|
9.2
|
%
|
|
|
11.0
|
%
|
|
9.5
|
%
|
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.
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|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
Store Count
|
August 4, 2018
|
|
|
July 29, 2017
|
|
|
|
August 4, 2018
|
|
|
July 29, 2017
|
|
Beginning of the period
|
1,651
|
|
|
1,561
|
|
|
|
1,622
|
|
|
1,533
|
|
Opened in the period
|
30
|
|
|
28
|
|
|
|
59
|
|
|
56
|
|
Closed in the period
|
(1
|
)
|
|
—
|
|
|
|
(1
|
)
|
|
—
|
|
End of the period
|
1,680
|
|
|
1,589
|
|
|
|
1,680
|
|
|
1,589
|
|
Sales.
Sales for the
three
month period ended
August 4, 2018
, increased
$306 million
, or
8.9%
, compared to the
three
month period ended
July 29, 2017
, due to the opening of
91
net new stores between
July 29, 2017
and
August 4, 2018
, and a
5%
increase in “comparable” store sales (defined as stores that have been open for more than 14 complete months).
Sales for the
six
month period ended
August 4, 2018
, increased
$589 million
, or
8.7%
, compared to the
six
month period ended
July 29, 2017
, due to the opening of
91
net new stores between
July 29, 2017
and
August 4, 2018
, and a
4%
increase in comparable store sales.
Our sales mix for the
three and six month
periods
ended
August 4, 2018
and
July 29, 2017
is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
August 4, 2018
|
|
|
July 29, 2017
|
|
|
August 4, 2018
|
|
|
July 29, 2017
|
|
Ladies
|
28
|
%
|
|
29
|
%
|
|
28
|
%
|
|
29
|
%
|
Home Accents and Bed and Bath
|
24
|
%
|
|
24
|
%
|
|
24
|
%
|
|
24
|
%
|
Shoes
|
14
|
%
|
|
14
|
%
|
|
14
|
%
|
|
14
|
%
|
Men's
|
14
|
%
|
|
14
|
%
|
|
13
|
%
|
|
13
|
%
|
Accessories, Lingerie, Fine Jewelry, and Fragrances
|
12
|
%
|
|
12
|
%
|
|
13
|
%
|
|
12
|
%
|
Children's
|
8
|
%
|
|
7
|
%
|
|
8
|
%
|
|
8
|
%
|
Total
|
100
|
%
|
|
100
|
%
|
|
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 and six
month periods ended
August 4, 2018
, 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 and six
month periods ended
August 4, 2018
,
increased
$246 million
and
$438 million
compared to the same periods in the prior year, mainly due to increased sales from the opening of
91
net new stores and a
5%
and
4%
increase in comparable store sales, respectively.
Cost of goods sold as a percentage of sales for the three month period ended
August 4, 2018
, increased approximately 80 basis points from the same period in the prior year, primarily due to an 85 basis point increase in distribution expenses from the unfavorable timing of packaway related costs, and a 30 basis point increase in freight costs. These increases were partially offset by a 15 basis point improvement in merchandise margin and lower occupancy and buying costs of 15 and five basis points, respectively.
Cost of goods sold as a percentage of sales for the
six
month period ended
August 4, 2018
, increased approximately 30 basis points from the same period in the prior year, primarily due to a 35 basis point increase in distribution expenses from the unfavorable timing of packaway costs, a 25 basis point increase in freight costs, and a five basis point increase in buying costs.
These increases were partially offset by a 20 basis point improvement in merchandise margin and 15 basis points of lower occupancy costs.
We cannot be sure that the gross profit margins realized for the
three and six month periods
ended
August 4, 2018
, will continue in the future.
Selling, general and administrative expenses.
For the
three and six month periods
ended
August 4, 2018
, selling, general and administrative expenses ("SG&A")
increased
$56 million
and
$106 million
compared to the same periods in the prior year, mainly due to increased store operating costs reflecting the opening of
91
net new stores between
July 29, 2017
and
August 4, 2018
.
Selling, general and administrative expenses as a percentage of sales for the
three and six month periods
ended
August 4, 2018
, increased approximately 30 basis points from the same periods in the prior year primarily due to higher wage-related costs and the anniversary of a nonrecurring benefit from legal-related costs in 2017.
Interest (income) expense, net
.
Interest (income) expense, net
for the
three and six month periods
ended
August 4, 2018
, increased compared to the same periods in the prior year primarily due to an increase in interest income.
Interest (income) expense, net
for the
three and six month
periods
ended
August 4, 2018
and
July 29, 2017
, consists of the following:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
($000)
|
August 4, 2018
|
|
|
July 29, 2017
|
|
|
|
August 4, 2018
|
|
|
July 29, 2017
|
|
Interest expense on long-term debt
|
$
|
4,646
|
|
|
$
|
4,644
|
|
|
|
$
|
9,291
|
|
|
$
|
9,288
|
|
Other interest expense
|
233
|
|
|
233
|
|
|
|
535
|
|
|
502
|
|
Capitalized interest
|
(634
|
)
|
|
(120
|
)
|
|
|
(1,132
|
)
|
|
(182
|
)
|
Interest income
|
(5,638
|
)
|
|
(2,416
|
)
|
|
|
(10,590
|
)
|
|
(4,098
|
)
|
Interest (income) expense, net
|
$
|
(1,393
|
)
|
|
$
|
2,341
|
|
|
|
$
|
(1,896
|
)
|
|
$
|
5,510
|
|
Taxes on earnings.
Our effective tax rates for the three month periods ended
August 4, 2018
and
July 29, 2017
, were approximately
25%
and
38%
, respectively. Our effective tax rates for the six month periods ended
August 4, 2018
and
July 29, 2017
, were approximately
24%
and
37%
, respectively. The decrease in effective tax rate was primarily due to the reduced U.S. federal corporate income tax rate from 35% to 21%. 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 tax rate is impacted by changes in tax law and accounting guidance, 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
2018
will be between 24% and 25%.
The Tax Cuts and Jobs Act (the “Tax Act” or "tax reform") was signed into law on December 22, 2017. The Tax Act made significant changes to U.S. corporate taxation, including reducing the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018. For the
three and six month periods
ended
August 4, 2018
, our provision for taxes on earnings differed from the federal corporate income tax rate of 21%, primarily because of the effects of state and local taxes, the net tax benefit associated with share-based compensation, and resolution of tax positions with taxing authorities. These items resulted in an effective tax rate for the
three and six month periods
ended
August 4, 2018
of
25%
and
24%
as compared to
38%
and
37%
for the
three and six month periods
ended
July 29, 2017
.
Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which provides guidance on accounting for the impact of the Tax Act. As permitted by SAB 118, we recorded provisional amounts for both current and deferred income taxes related to the reduced U.S. federal corporate income tax rate in fiscal 2017. The recorded provisional amounts totaling $80.1 million of tax benefit, reflect assumptions made based upon our current interpretation of the Tax Act, and may change as we receive additional clarification and guidance in the form of technical corrections to the Tax Act or regulations issued by the U.S. Treasury. As of
August 4, 2018
, we have not recorded any adjustment to the provisional amounts recorded in fiscal 2017.
Net earnings.
Net earnings as a percentage of sales for the
three and six month periods
ended
August 4, 2018
, was higher compared to the same periods in the prior year primarily due to the decrease in the effective tax rate from the Tax Act.
Earnings per share
. Diluted earnings per share were
$1.04
and
$2.15
for the
three and six month periods
ended
August 4, 2018
, which included an $0.18 and $0.35 per share benefit from recently enacted tax legislation, respectively, compared to
$0.82
and
$1.64
for the
three and six month periods
ended
July 29, 2017
. The
27%
and
31%
increase in diluted earnings per share for the
three and six month periods
ended August 4, 2018, was attributable to a
23%
and a
27%
increase in net earnings (inclusive of the reduction in tax rates), respectively, and 4% from the reduction in weighted average diluted shares outstanding due to stock repurchases under our stock repurchase program for both of the three and six month periods.
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, and we may use cash for the repayment of debt as it becomes due.
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
($000)
|
August 4, 2018
|
|
|
July 29, 2017
1
|
|
Cash provided by operating activities
|
$
|
1,014,184
|
|
|
$
|
797,959
|
|
Cash used in investing activities
|
(178,130
|
)
|
|
(169,316
|
)
|
Cash used in financing activities
|
(739,795
|
)
|
|
(589,053
|
)
|
Net increase in cash, cash equivalents, and restricted cash and cash equivalents
|
$
|
96,259
|
|
|
$
|
39,590
|
|
1
As the result of the adoption of ASU 2016-18,
Statement of Cash Flow (Topic 230): Restricted Cash
, the prior year amounts were retrospectively adjusted. See Note A.
Operating Activities
Net cash provided by operating activities was
$1,014.2 million
and
$798.0 million
for the
six
month periods ended
August 4, 2018
and
July 29, 2017
, 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
six
month period ended
August 4, 2018
, compared to the same period in the prior year was primarily driven by higher earnings. Accounts payable leverage (defined as accounts payable divided by merchandise inventory) was
70%
,
65%
, and
73%
as of
August 4, 2018
,
February 3, 2018
, and
July 29, 2017
, respectively. The timing of inventory receipts and related payments versus prior periods is the primary driver of changes in accounts payable leverage.
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 purchase, but typically packaway remains in storage less than six months. We expect to continue to take advantage of packaway inventory opportunities to maximize our ability to deliver bargains to our customers.
Changes in packaway inventory levels impact our operating cash flow. As of
August 4, 2018
, packaway inventory was
44%
of total inventory compared to
49%
at the end of fiscal
2017
. As of
July 29, 2017
, packaway inventory was
46%
of total inventory compared to
49%
at the end of fiscal
2016
.
Investing Activities
Net cash used in investing activities was
$178.1 million
and
$169.3 million
for the
six
month periods ended
August 4, 2018
and
July 29, 2017
, respectively. The
increase
in cash used for investing activities for the
six
month period ended
August 4, 2018
compared to the
six
month period ended
July 29, 2017
was primarily due to an increase in our capital expenditures.
Our capital expenditures were
$178.6 million
and
$169.3 million
for the
six
month periods ended
August 4, 2018
and
July 29, 2017
, respectively. Our capital expenditures include costs to open new stores and improve existing stores; build, expand, and improve distribution centers; and for various other expenditures related to our information technology systems, and our buying and corporate offices.
We are forecasting approximately
$475 million
in capital expenditures for fiscal year
2018
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 fund capital expenditures with available cash and cash equivalents, and cash flows from operations.
Financing Activities
Net cash used in financing activities was
$739.8 million
and
$589.1 million
for the
six
month periods ended
August 4, 2018
and
July 29, 2017
, respectively. For the
six
month periods ended
August 4, 2018
and
July 29, 2017
, our liquidity and capital requirements were provided by available cash and cash equivalents, and cash flows from operations. The increase in cash used for financing activities for the
six
month period ended
August 4, 2018
, compared to the
six
month period ended
July 29, 2017
, was primarily due to an increase in the repurchase of our common stock under our stock repurchase program and higher cash dividends.
We repurchased
6.5 million
and
6.9 million
shares of common stock for aggregate purchase prices of approximately
$528.6 million
and
$430.1 million
during the
six
month periods ended
August 4, 2018
and
July 29, 2017
, respectively. We also acquired
0.7 million
and
0.6 million
shares of treasury stock under our employee stock equity compensation programs, for aggregate purchase prices of approximately
$51.1 million
and
$43.2 million
during the
six
month periods ended
August 4, 2018
and
July 29, 2017
, respectively. In March 2018, our Board of Directors approved an increase in the stock repurchase authorization for fiscal 2018 by $200 million to $1.075 billion, up from the previously available $875 million.
For the
six
month periods ended
August 4, 2018
and
July 29, 2017
, we paid cash dividends of
$170.0 million
and
$125.0 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
2018
.
We have a
$600 million
unsecured revolving credit facility which 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 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. As of
August 4, 2018
, 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 a financial leverage ratio covenant. As of
August 4, 2018
, we were in compliance with this covenant.
We estimate that existing cash and cash equivalent 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, repayment of debt, 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
August 4, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($000)
|
Less than
one year
|
|
|
1 - 3
years
|
|
|
3 - 5
years
|
|
|
After 5
years
|
|
|
Total¹
|
|
|
|
|
|
Senior notes
|
$
|
85,000
|
|
|
$
|
—
|
|
|
$
|
65,000
|
|
|
$
|
250,000
|
|
|
$
|
400,000
|
|
Interest payment obligations
|
15,394
|
|
|
25,364
|
|
|
18,997
|
|
|
12,656
|
|
|
72,411
|
|
Operating leases (rent obligations)
|
534,232
|
|
|
1,007,807
|
|
|
687,806
|
|
|
608,905
|
|
|
2,838,750
|
|
New York buying office ground lease
²
|
6,418
|
|
|
12,835
|
|
|
13,477
|
|
|
935,883
|
|
|
968,613
|
|
Purchase obligations
|
2,699,772
|
|
|
50,356
|
|
|
10,686
|
|
|
4,211
|
|
|
2,765,025
|
|
Total contractual obligations
|
$
|
3,340,816
|
|
|
$
|
1,096,362
|
|
|
$
|
795,966
|
|
|
$
|
1,811,655
|
|
|
$
|
7,044,799
|
|
1
We have a
$130.0 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 99-year ground lease.
Senior notes.
As of
August 4, 2018
, 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
August 4, 2018
, 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
6.38%
. The Series B notes totaling
$65 million
are due in
December 2021
, and bear interest at
6.53%
. Borrowings under these senior notes are subject to certain financial covenants, including interest coverage and other financial ratios. As of
August 4, 2018
, 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 two of our store locations. We also lease five warehouse facilities and two buying offices. 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 our leased warehouses are in Carlisle, Pennsylvania with leases expiring in 2019 and 2020. A third warehouse is in Fort Mill, South Carolina, with a lease expiring in 2024. The fourth warehouse is in Rock Hill, South Carolina, with a lease expiring in 2028. The fifth warehouse is in Shafter, California, with a lease expiring in 2029. All of the warehouse leases contain renewal provisions.
We currently lease approximately 87,000 and 5,000 square feet of office space for our Los Angeles and Boston buying offices, respectively. The lease terms for these facilities expire in 2022 and 2020, respectively, and contain renewal provisions.
Purchase obligations.
As of
August 4, 2018
, we had purchase obligations of approximately
$2.8 billion
. 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
August 4, 2018
,
February 3, 2018
, and
July 29, 2017
, we had
$7.8 million
,
$8.7 million
, and
$11.6 million
, respectively, in standby letters of credit outstanding and
$57.6 million
,
$57.1 million
and
$56.8 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
$24.9 million
,
$20.7 million
, and
$35.6 million
in trade letters of credit outstanding at
August 4, 2018
,
February 3, 2018
, and
July 29, 2017
, respectively.
Dividends.
In
August 2018
, our Board of Directors declared a cash dividend of
$0.225
per common share, payable on
September 28, 2018
.
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
second
quarter of fiscal
2018
, there have been no significant changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year ended
February 3, 2018
.
Effective February 4, 2018, the Company adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers (ASC 606)
and ASU No. 2016-18,
Statement of Cash Flows, Restricted Cash
. See Note A - Summary of Significant Accounting Policies in the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the adoption of ASC 606 and ASU No. 2016-18 and recently issued accounting standards.
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,” "outlook," “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. 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:
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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, which could adversely affect us.
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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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Our need to effectively manage our inventories, markdowns, and inventory shortage in order to achieve our planned gross margins.
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Our dependence 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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Information or 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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Our need to obtain acceptable new store sites with favorable consumer demographics to achieve our planned growth.
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Our need to expand in existing markets and enter new geographic markets in order to achieve growth.
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Consumer problems or legal issues involving the quality, safety, or authenticity of products we sell, which could harm our reputation, result in lost sales, and/or increase our costs.
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An adverse outcome in various legal, regulatory, or tax matters that could increase our costs.
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Damage to our corporate reputation or brands that could adversely affect our sales and operating results.
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Our need to continually attract, train, and retain associates with the retail talent necessary to execute our off-price retail strategies.
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Our need to effectively advertise and market our business.
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Risks associated with selling and importing merchandise produced in other countries.
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Changes in U.S. tax or tariff policy regarding apparel and home-related merchandise produced in other countries, which could adversely affect our business.
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Possible volatility in our revenues and earnings.
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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 that could harm our business.
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Our need to maintain sufficient liquidity to support our continuing operations, our new store and distribution center growth plans, and our stock repurchase program and quarterly dividends.
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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.