Total stock-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Earnings for the three and nine month periods ended November 2, 2019 and November 3, 2018, and October 28, 2017, is as follows:
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.
The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | Nine 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 |
|
November 3, 2018 | | | | | | | | | | | | |
Shares | 368,102 |
| | 2,959 |
| | 371,061 |
| | | 370,977 |
| | 2,959 |
| | 373,936 |
|
Amount | $ | 0.92 |
| | $ | (0.01 | ) | | $ | 0.91 |
| | | $ | 3.09 |
| | $ | (0.03 | ) | | $ | 3.06 |
|
| | | | | | | | | | | | |
October 28, 2017 | | | | | | | | | | | | |
Shares | 379,432 |
| | 2,700 |
| | 382,132 |
| | | 382,959 |
| | 2,864 |
| | 385,823 |
|
Amount | $ | 0.72 |
| | $ | — |
| | $ | 0.72 |
| | | $ | 2.38 |
| | $ | (0.02 | ) | | $ | 2.36 |
|
Note E: Leases
The Company currently leases all but 2 of its store locations with original, non-cancelable terms that in general range from three to ten years. Store leases typically contain provisions for 3 to 4 renewal options of five years each. The exercise of lease renewal options is at the sole discretion of the Company. Most store leases also provide for minimum annual rentals and for payment of variable lease costs. In addition, some store leases also have provisions for additional rent based on a percentage of sales (“percentage rent”) and others include rental payments adjusted periodically for inflation. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company does not have any financing leases.
The Company leases 5 warehouses, and has 4 third-party warehousing arrangements. All of these contain renewal provisions, except for the third-party warehouse in Fort Mill, South Carolina. The following table summarizes the location and expiration date of the Company’s leased warehouses:
| | | | | | | | |
Location | | Lease Expiration Date |
Leased Warehouses | | |
Carlisle, Pennsylvania | | 2020 |
Carlisle, Pennsylvania | | 2021 |
Fort Mill, South Carolina | | 2024 |
Rock Hill, South Carolina | | 2028 |
Shafter, California | | 2029 |
| | |
Third-Party Warehouses | | |
Fort Mill, South Carolina | | 2020 |
Moreno Valley, California | | 2023 |
Moreno Valley, California | | 2029 |
Shafter, California | | 2020 |
The Company leases approximately 103,000 and 5,000 square feet of office space for its Los Angeles and Boston buying offices, respectively. The lease term for these facilities expire in 2022 and 2020, respectively, and contain renewal provisions. In addition, the Company has a ground lease related to its New York buying office.
The following table presents operating lease costs included in the Condensed Consolidated Statement of Earnings for the three and nine month periods ended November 2, 2019:
| | | | | | | | | | | | | |
| | Three Months Ended | Nine Months Ended | | |
($000) | | | November 2, 2019 | November 2, 2019 | | |
Operating lease cost 1 | | $ | 161,514 | | $ | 476,728 | | | |
Variable lease costs 2 | | 44,381 | | 131,167 | | | |
Net lease cost 3 | | $ | 205,895 | | $ | 607,895 | | | |
| | | | | |
1 Net of sublease income which was immaterial.
| | | | | |
2 Includes property and rent taxes, insurance, common area maintenance, and percentage rent.
| | | | | |
3 Excludes short-term lease costs which were immaterial.
| | | | | |
The maturity of operating lease liabilities, including the ground lease related to the New York buying office as of November 2, 2019, are as follows:
| | | | | | | | |
($000) | | | Operating Leases 1 |
2020 | | $ | 604,022 | |
2021 | | 616,088 | |
2022 | | 547,653 | |
2023 | | 461,997 | |
2024 | | 355,736 | |
Thereafter | | 1,653,544 | |
Total lease payments | | 4,239,040 | |
Less: interest | | 1,078,235 | |
Present value of lease liabilities | | $ | 3,160,805 | |
Less: current operating lease liabilities | | 559,433 | |
Non-current operating lease liabilities | | $ | 2,601,372 | |
| | |
1 Operating lease payments exclude $197.3 million of minimum lease payments for leases signed that have not yet commenced.
| | |
At November 2, 2019, the weighted-average remaining lease term and the weighted average discount rate for operating leases is 10.8 years and 3.5%, respectively. The weighted-average remaining lease term and the weighted average discount rate, excluding the long-term ground lease related to the New York buying office, were 6.2 years and 3.2%, respectively.
Cash paid for amounts included in the measurement of operating lease liabilities was $152.1 million and $453.9 million, respectively, for the three and nine month periods ended November 2, 2019 and is included in Net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows.
Operating lease assets obtained in exchange for new operating lease liabilities (includes new leases and remeasurements or modifications of existing leases) during the three and nine month periods ended November 2, 2019 were $251.4 million and $586.8 million, respectively.
In accordance with ASC 840, the aggregate undiscounted future minimum annual lease payments under leases, including the ground lease related to the New York buying office, in effect at February 2, 2019 were as follows:
| | | | | | | | |
| | |
($000) | | Total operating leases |
2019 | | $ | 555,812 | |
2020 | | 580,712 | |
2021 | | 499,678 | |
2022 | | 424,695 | |
2023 | | 339,340 | |
Thereafter | | 1,575,673 | |
Total minimum lease payments | | $ | 3,975,910 | |
Note F: Debt
Senior notes. Unsecured senior debt, net of unamortized discounts and debt issuance costs, consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
($000) | | November 2, 2019 | | February 2, 2019 | | November 3, 2018 |
6.38% Series A Senior Notes due 2018 | | $ | — | | | $ | — | | | $ | 84,997 | |
6.53% Series B Senior Notes due 2021 | | 64,958 | | | 64,942 | | | 64,937 | |
3.375% Senior Notes due 2024 | | 247,820 | | | 247,498 | | | 247,391 | |
Total long-term debt | | | $ | 312,778 | | | $ | 312,440 | | | $ | 397,325 | |
Less: current portion | | — | | | — | | | 84,997 | |
Total due beyond one year | | $ | 312,778 | | | $ | 312,440 | | | $ | 312,328 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | | |
($000) | | November 3, 2018 |
| | February 3, 2018 |
| | October 28, 2017 |
|
6.38% Series A Senior Notes due 2018 | | $ | 84,997 |
| | $ | 84,973 |
| | $ | 84,964 |
|
6.53% Series B Senior Notes due 2021 | | 64,937 |
| | 64,922 |
| | 64,917 |
|
3.375% Senior Notes due 2024 | | 247,391 |
| | 247,072 |
| | 246,967 |
|
Total long-term debt | | $ | 397,325 |
| | $ | 396,967 |
| | $ | 396,848 |
|
| | | | | | |
Less: current portion | | 84,997 |
| | 84,973 |
| | — |
|
Total due beyond one year | | $ | 312,328 |
| | $ | 311,994 |
|
| $ | 396,848 |
|
As of November 3, 2018,2, 2019, the Company also had outstanding Series B unsecured Senior Notes in the aggregate principal amount of $65 million held by various institutional investors. The Series B notes 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 November 2, 2019, the Company was in compliance with these covenants.
As of November 2, 2019, 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 November 3,On December 13, 2018,, the Company also had outstanding two other series of unsecured senior notes inrepaid at maturity the aggregate$85 million principal amount of $150 million, held by various institutional investors. Thethe 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 November 3, 2018, the Company was in compliance with these covenants. unsecured Senior Notes.
As of November 2, 2019, February 2, 2019, and November 3, 2018, February 3, 2018, and October 28, 2017, total unamortized discount and debt issuance costs were $2.7$2.2 million, $3.0$2.6 million, and $3.2$2.7 million, respectively, and were classified as a reduction of Long-term debt.
The 2024 Notes, Series A, and the Series B senior notesSenior Notes are all subject to prepayment penalties for early payment of principal.
The aggregate fair value of the threetwo outstanding senior note issuancesseries of Senior Notes was approximately $402 million, $411$333 million and $415$316 million, as of November 2, 2019andFebruary 2, 2019, respectively, compared to $402 million for the then three outstanding series of Senior Notes as of November 3, 2018, February 3, 2018, and October 28, 2017, respectively.2018. 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 nine month periods ended November 2, 2019 and November 3, 2018 and October 28, 2017:2018:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | Nine Months Ended | | |
($000) | November 2, 2019 | | November 3, 2018 | | | November 2, 2019 | | November 3, 2018 |
Interest expense on long-term debt | $ | 3,284 | | | $ | 4,646 | | | | $ | 9,850 | | | $ | 13,937 | |
Other interest expense | 216 | | | 233 | | | | 756 | | | 768 | |
Capitalized interest | (1,186) | | | (700) | | | | (3,069) | | | (1,832) | |
Interest income | (6,716) | | | (7,132) | | | | (22,356) | | | (17,722) | |
Interest income, net | $ | (4,402) | | | $ | (2,953) | | | | $ | (14,819) | | | $ | (4,849) | |
|
| | | | | | | | | | | | | | | | |
| Three Months Ended | | | Nine Months Ended |
($000) | November 3, 2018 |
| | October 28, 2017 |
| | | November 3, 2018 |
| | October 28, 2017 |
|
Interest expense on long-term debt | $ | 4,646 |
| | $ | 4,645 |
| | | $ | 13,937 |
| | $ | 13,933 |
|
Other interest expense | 233 |
| | 233 |
| | | 768 |
| | 735 |
|
Capitalized interest | (700 | ) | | (205 | ) | | | (1,832 | ) | | (387 | ) |
Interest income | (7,132 | ) | | (2,893 | ) | | | (17,722 | ) | | (6,991 | ) |
Interest (income) expense, net | $ | (2,953 | ) | | $ | 1,780 |
| | | $ | (4,849 | ) | | $ | 7,290 |
|
Revolving credit facility. TheIn July 2019, the Company entered into a new $800 million unsecured revolving credit facility, which replaced the Company’s previous $600 million unsecured revolving credit facility. This new credit facility expires in April 2021July 2024, 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).credit. The facility also contains an option allowing the Company to increase the size of its credit facility by up to an additional $200$300 million, with the agreement of the lenders. Interest on any borrowings under this facility is based on LIBOR (or an alternate benchmark rate, if LIBOR is no longer available) plus an applicable margin (currently 10075 basis points) and is payable quarterly and upon maturity. The revolving credit facility may be extended, at the Company's option, for up to 2 additional one-year periods, subject to customary conditions. As of November 3, 2018,2, 2019, the Company had no0 borrowings or standby letters of credit outstanding under this facility and the $600$800 million credit facility remains in place and available.
The revolving credit facility is subject to a financial leverage ratio covenant. As of November 3, 2018,2, 2019, the Company was in compliance with this covenant.
Note F:G: 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 nine month periods ended November 3, 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 nine month periods ended November 3, 2018 of 24% as compared to 38% and 37% for the three and nine month periods ended October 28, 2017, respectively.
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 reflected assumptions made based upon the Company’s interpretation of the Tax Act. As of November 3, 2018, the Company has not recorded any adjustment to the provisional amounts recorded in fiscal 2017. With the completion and filing of the 2017 federal return during the quarter ended November 3, 2018, the Company considers the deferred tax remeasurements and other adjustments related to the Tax Act to be complete.
As of November 2, 2019, February 2, 2019, and November 3, 2018, February 3, 2018, and October 28, 2017, the reserves for unrecognized tax benefits were $130.5$83.4 million, $121.3$78.8 million, and $109.3$130.5 million, inclusive of $25.4$13.9 million, $22.6$13.0 million, and $20.8$25.4 million of related interest and penalties, respectively. In November 2018, the Company resolved uncertain tax positions related to fiscal 2015 with the Internal Revenue Service. As a result, the Company recognized a decrease in reserves for tax positions in prior periods of $52.4 million, inclusive of $12.6 million of related reserves for interest and penalties. The Company accounts for interest and penalties related to unrecognized tax benefits as a part of its provision for taxes on earnings. If recognized, $87.8$66.8 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.
Certain federal and state tax returns are under audit by various tax authorities. Subsequent to the three month period ended November 3, 2018,2, 2019, the Company received notice thatresolved uncertain tax positions related to fiscal 2015 were resolved with the Internal Revenue Service.a state tax authority. As a result, the Company expects to recognize a tax benefit of an approximate $26.2$10.0 million in the Consolidated Statement of Earnings, and a decrease in unrecognized tax benefits of approximately $53.3$16.2 million, inclusive of $12.8$6.6 million of interest and penalties, in the three month period ending February 2, 2019.1, 2020.
It is reasonably possible that certain tax matters may be concluded or statutes of limitations may lapse during the next twelve months. Accordingly, excluding the impact of the aforementioned IRS tax resolution to be recognized in the quarter ended February 2, 2019, the total amount of unrecognized tax benefits may decrease by up to $8.2 million.
The Company is open to audit by the Internal Revenue Service under the statute of limitations for fiscal years 20152016 through 2017.2018. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years 20132014 through 2017.
2018. It is reasonably possible that certain state tax matters may be concluded or statutes of limitations may lapse during the next 12 months. Accordingly, excluding the impact of the aforementioned state tax resolution to be recognized in the quarter ended February 1, 2020, the total amount of unrecognized tax benefits may decrease by up to $4.9 million.
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 November 2, 2019 and November 3, 2018, and October 28, 2017, the related condensed consolidated statements of earnings, comprehensive income, and stockholders' equity, for the three and nine month periods ended November 2, 2019 and November 3, 2018, and October 28, 2017, and of cash flows for the nine month periods ended November 2, 2019 and November 3, 2018, and October 28, 2017, and the related notes (collectively referred to as the "interim“interim financial information"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, 2018,2, 2019, 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, 2018,2, 2019, 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, 20182, 2019 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
December 12, 2018
11, 2019
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 2017.2018. 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 2017.2018. 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 1,4831,550 locations in 3839 states, the District of Columbia and Guam as of November 3, 2018.2, 2019. 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 237260 dd’s DISCOUNTS stores in 1819 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 nine month periods ended November 2, 2019 and November 3, 2018 and October 28, 2017:2018:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| Three Months Ended | | | | | Nine Months Ended | | |
| November 2, 2019 | | November 3, 2018 | | | November 2, 2019 | | November 3, 2018 |
Sales | | | | | | | | |
Sales (millions) | $ | 3,849 | | | $ | 3,550 | | | | $ | 11,626 | | | $ | 10,876 | |
Sales growth | 8.4 | % | | 6.6 | % | | | 6.9 | % | | 8.0 | % |
Comparable store sales growth | 5 | % | | 3 | % | | | 3 | % | | 3 | % |
| | | | | | | | |
Costs and expenses (as a percent of sales) | | | | | | | | |
Cost of goods sold | 71.9 | % | | 71.8 | % | | | 71.5 | % | | 71.1 | % |
Selling, general and administrative | 15.7 | % | | 15.8 | % | | | 15.1 | % | | 15.1 | % |
Interest income, net | | (0.1 | %) | | (0.1 | %) | | | (0.1 | %) | | (0.0 | %) |
| | | | | | | | |
Earnings before taxes (as a percent of sales) | 12.5 | % | | 12.5 | % | | | 13.5 | % | | 13.8 | % |
| | | | | | | | |
Net earnings (as a percent of sales) | 9.6 | % | | 9.5 | % | | | 10.4 | % | | 10.5 | % |
|
| | | | | | | | | | | | | | | | |
| Three Months Ended | | | Nine Months Ended |
| November 3, 2018 |
| | October 28, 2017 |
| | | November 3, 2018 |
| | October 28, 2017 |
|
Sales | | | | | | | | |
Sales (millions) | $ | 3,550 |
| | $ | 3,329 |
| | | $ | 10,876 |
| | $ | 10,067 |
|
Sales growth | 6.6 | % | | 7.8 | % | | | 8.0 | % | | 7.6 | % |
Comparable store sales growth | 3 | % | | 4 | % | | | 3 | % | | 4 | % |
| | | | | | | | |
Costs and expenses (as a percent of sales) | | | | | | | | |
Cost of goods sold | 71.8 | % | | 71.2 | % | | | 71.1 | % | | 70.7 | % |
Selling, general and administrative | 15.8 | % | | 15.5 | % | | | 15.1 | % | | 14.8 | % |
Interest (income) expense, net | (0.1 | %) | | 0.1 | % | | | (0.0 | %) | | 0.1 | % |
| | | | | | | | |
Earnings before taxes (as a percent of sales) | 12.5 | % | | 13.2 | % | | | 13.8 | % | | 14.4 | % |
| | | | | | | | |
Net earnings (as a percent of sales) | 9.5 | % | | 8.2 | % | | | 10.5 | % | | 9.1 | % |
Stores. Our expansion strategy is to open additional stores based on market penetration, local demographic characteristics, competition, expected store profitability, and the ability to leverage overhead expenses. We continually evaluate opportunistic real estate acquisitions and opportunities for potential new store locations. We also evaluate our current store locations and determine store closures based on similar criteria.
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | Nine Months Ended | | |
Store Count | November 2, 2019 | | November 3, 2018 | | | November 2, 2019 | | November 3, 2018 |
Beginning of the period | 1,772 | | | 1,680 | | | | 1,717 | | | 1,622 | |
Opened in the period | 42 | | | 40 | | | | 98 | | | 99 | |
Closed in the period | (4) | | 1 | — | | | | (5) | | 1 | (1) | |
End of the period | 1,810 | | | 1,720 | | | | 1,810 | | | 1,720 | |
|
| | | | | | | | | | | | |
| Three Months Ended | | | Nine Months Ended |
Store Count | November 3, 2018 |
| | October 28, 2017 |
| | | November 3, 2018 |
| | October 28, 2017 |
|
Beginning of the period | 1,680 |
| | 1,589 |
| | | 1,622 |
| | 1,533 |
|
Opened in the period | 40 |
| | 40 |
| | | 99 |
| | 96 |
|
Closed in the period | — |
| | (2 | ) | | | (1 | ) | | (2 | ) |
End of the period | 1,720 |
| | 1,627 |
| | | 1,720 |
| | 1,627 |
|
1 Includes a temporary closure of a store impacted by a weather event.
Sales. Sales for the three month period ended November 3, 2018,2, 2019, increased $221$299 million, or 6.6%8.4%, compared to the three month period ended October 28, 2017,November 3, 2018, due to the opening of 9390 net new stores between October 28, 2017 and November 3, 2018 and November 2, 2019, and a 3%5% increase in “comparable” store sales (defined as stores that have been open for more than 14 complete months).
Sales for the nine month period ended November 3, 2018,2, 2019, increased $809$750 million, or 8.0%6.9%, compared to the nine month period ended October 28, 2017,November 3, 2018, due to the opening of 9390 net new stores between October 28, 2017November 3, 2018 and November 3, 2018,2, 2019, and a 3% increase in comparable“comparable” store sales.
Our sales mix for the three and nine month periods ended November 2, 2019 and November 3, 2018 and October 28, 2017 is shown below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| November 2, 2019 | | November 3, 2018 | | November 2, 2019 | | November 3, 2018 |
Ladies | 26 | % | | 27 | % | | 27 | % | | 28 | % |
Home Accents and Bed and Bath | 24 | % | | 25 | % | | 24 | % | | 24 | % |
Shoes | 14 | % | | 13 | % | | 14 | % | | 14 | % |
Men's | 14 | % | | 14 | % | | 14 | % | | 13 | % |
Accessories, Lingerie, Fine Jewelry, and Fragrances | 13 | % | | 13 | % | | 13 | % | | 13 | % |
Children's | 9 | % | | 8 | % | | 8 | % | | 8 | % |
Total | 100 | % | | 100 | % | | 100 | % | | 100 | % |
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| November 3, 2018 |
| | October 28, 2017 |
| | November 3, 2018 |
| | October 28, 2017 |
|
Ladies | 27 | % | | 28 | % | | 28 | % | | 28 | % |
Home Accents and Bed and Bath | 25 | % | | 25 | % | | 24 | % | | 25 | % |
Men's | 14 | % | | 13 | % | | 13 | % | | 13 | % |
Shoes | 13 | % | | 13 | % | | 14 | % | | 14 | % |
Accessories, Lingerie, Fine Jewelry, and Fragrances | 13 | % | | 13 | % | | 13 | % | | 12 | % |
Children's | 8 | % | | 8 | % | | 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 localour merchandise offerings. Although our strategies and store expansion program contributed to sales gains for the three and nine month periods ended November 3, 2018,2, 2019, 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 nine month periods ended November 3, 2018,2, 2019, increased $178$219 million and $616$575 million compared to the same periods in the prior year, mainly due to increased sales from the opening of 9390 net new stores and a 5% and 3% increase in comparable store sales, for both periods.respectively.
Cost of goods sold as a percentage of sales for the three month period ended November 3, 2018,2, 2019, increased approximately 6010 basis points from the same period in the prior year, primarily due to a 5045 basis point increase in freight costs, and buying and distribution costs that were higher by 15 basis points each. These increases wereexpenses, partially offset by a 20 basis point improvement in merchandise margin.margin, a 10 basis point decrease in occupancy costs, and a five basis point decrease in buying costs.
Cost of goods sold as a percentage of sales for the nine month period ended November 3, 2018,2, 2019, increased approximately 4035 basis points from the same period in the prior year, primarily due to a 3530 basis point increase in distribution expenses, a
20 basis point increase in freight costs, a 25 basis point
increase in distribution expenses, and a 10five basis point increase in buyingoccupancy costs. These increases were partially offset by a 20 basis point improvement in merchandise margin and 10 basis points of lower occupancy costs.margin.
We cannot be sure that the gross profit margins realized for the three and nine month periods ended November 3, 2018,2, 2019, will continue in the future.
Selling, general and administrative expenses. For the three and nine month periods ended November 3, 2018,2, 2019, selling, general and administrative expenses ("SG&A") increased $44$43 million and $150$114 million compared to the same periods in the prior year, mainly due to increased store operating costs reflecting the opening of 9390 net new stores between October 28, 2017November 3, 2018 and November 3, 2018.2, 2019.
Selling, general and administrative expenses as a percentage of sales for the three and nine month periodsperiod ended November 3, 2018, increased2, 2019, decreased approximately 3010 basis points from the same periodsperiod in the prior year primarily due to wage investments.leverage on higher sales. Selling, general and administrative expenses as a percentage of sales for the nine month period ended November 2, 2019, was unchanged from the same period in the prior year.
Interest (income)income, net. Interest income, net for the three and nine month periods ended November 2, 2019, increased compared to the same periods in the prior year. The increase for the three month period ended November 2, 2019 was primarily due to lower interest expense net.on long-term debt due to the repayment of Series A 6.38% unsecured Senior Notes in December 2018. The increase for the nine month period ended November 2, 2019 was primarily due to an increase in interest income due to higher interest rates, and lower interest expense on long-term debt due to the repayment of Series A 6.38% unsecured Senior Notes in December 2018. Interest (income) expense,income, net for the three and nine month periods ended November 2, 2019 and November 3, 2018, consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | Nine Months Ended | | |
($000) | November 2, 2019 | | November 3, 2018 | | | November 2, 2019 | | November 3, 2018 |
Interest expense on long-term debt | $ | 3,284 | | | $ | 4,646 | | | | $ | 9,850 | | | $ | 13,937 | |
Other interest expense | 216 | | | 233 | | | | 756 | | | 768 | |
Capitalized interest | (1,186) | | | (700) | | | | (3,069) | | | (1,832) | |
Interest income | (6,716) | | | (7,132) | | | | (22,356) | | | (17,722) | |
Interest income, net | $ | (4,402) | | | $ | (2,953) | | | | $ | (14,819) | | | $ | (4,849) | |
Taxes on earnings. Our effective tax rate for the three and nine month periods ended November 2, 2019, was approximately 23%. Our effective tax rate for the three and nine month periods ended November 3, 2018, increasedwas approximately 24%. The decreases in the effective tax rate for the three and nine month periods ended November 2, 2019 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 nine month periods ended November 3, 2018 and October 28, 2017, consists of the following:
|
| | | | | | | | | | | | | | | | |
| Three Months Ended | | | Nine Months Ended |
($000) | November 3, 2018 |
| | October 28, 2017 |
| | | November 3, 2018 |
| | October 28, 2017 |
|
Interest expense on long-term debt | $ | 4,646 |
| | $ | 4,645 |
| | | $ | 13,937 |
| | $ | 13,933 |
|
Other interest expense | 233 |
| | 233 |
| | | 768 |
| | 735 |
|
Capitalized interest | (700 | ) | | (205 | ) | | | (1,832 | ) | | (387 | ) |
Interest income | (7,132 | ) | | (2,893 | ) | | | (17,722 | ) | | (6,991 | ) |
Interest (income) expense, net | $ | (2,953 | ) | | $ | 1,780 |
| | | $ | (4,849 | ) | | $ | 7,290 |
|
Taxes on earnings. Our effective tax rates for the three month periods ended November 3, 2018 and October 28, 2017, were approximately 24% and 38%, respectively. Our effective tax rates for the nine month periods ended November 3, 2018 and October 28, 2017, were approximately 24% and 37%, respectively. The decrease in effective tax rate was primarily due to the reduced U.S. federal corporate incomeresolution of tax rate from 35% to 21%.positions with various tax authorities. 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, tax effects associated with share-based compensation, and the resolution of tax positions with various taxingtax authorities. Subsequent to the three month period ended November 3, 2018,2, 2019, we received notice thatresolved uncertain tax positions related to fiscal 2015 were resolved with the Internal Revenue Service.a state tax authority. As a result, we expect to recognize a tax benefit of approximately $26.2$10.0 million in the Consolidated Statement of Earnings, and a decrease in unrecognized tax benefits of approximately $53.3$16.2 million, inclusive of $12.8$6.6 million of interest and penalties, in the three month period ending February 2, 2019.1, 2020. We anticipate that our effective tax rate for fiscal 20182019 will be between 22%approximately 23%.
Net earnings. Net earnings as a percentage of sales for the three month period ended November 2, 2019, was higher compared to the same period in the prior year primarily due to lower taxes on earnings. Net earnings as a percentage of sales for the nine month period ended November 2, 2019, was lower compared to the same period in the prior year primarily due to higher cost of goods sold, partially offset by lower taxes on earnings and 23%.higher net interest income as a percentage of sales.
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. ForEarnings per share. Diluted earnings per share for the three and nine month periods ended November 3, 2018, our provision for taxes on earnings differed from the federal corporate income tax rate of 21%, primarily because of the effects of state2, 2019 were $1.03 and local taxes, the net tax benefit associated with share-based compensation,$3.32, respectively, compared to $0.91 and resolution of tax positions with taxing authorities. These items resulted in an effective tax rate$3.06, respectively, for the three and nine month periods ended November 3, 2018 of 24% as compared to 38%2018. The 13% and 37% for the three and nine month periods ended October 28, 2017, respectively.
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 reflected assumptions made based upon our interpretation of the Tax Act. As of November 3, 2018, we have not recorded any adjustment to the provisional amounts recorded in fiscal 2017. With the completion and filing of the 2017 federal return during the quarter ended November 3, 2018, we consider the deferred tax remeasurements and other adjustments related to the Tax Act to be complete.
Net earnings. Net earnings as a percentage of sales for the three and nine month periods ended November 3, 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 $0.91 and $3.06 for the three and nine month periods ended November 3, 2018, which included a $0.16 and $0.51 per share benefit from recently enacted tax legislation, respectively, compared to $0.72 and $2.36 for the three and nine month periods ended October 28, 2017. The 26%and 30% increase8% increases in diluted earnings per share for the three and nine month periods ended November 3, 2018, was2, 2019, were attributable to a 23%10% and a 26% increase5% increases in net earnings, (inclusive of the reduction in tax rates), respectively, and 3% and 4%increases from the reduction in
weighted average diluted shares outstanding, respectively,largely due to stock repurchases under our stock repurchase program for both of the three and nine 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,operating and variable lease costs, 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.
| | | | | | | | | | | |
| Nine Months Ended | | |
($000) | November 2, 2019 | | November 3, 2018 |
Cash provided by operating activities | $ | 1,410,930 | | | $ | 1,450,072 | |
Cash used in investing activities | (400,734) | | | (292,627) | |
Cash used in financing activities | (1,284,748) | | | (1,099,128) | |
Net (decrease) increase in cash, cash equivalents, and restricted cash and cash equivalents | $ | (274,552) | | | $ | 58,317 | |
|
| | | | | | | |
| Nine Months Ended |
($000) | November 3, 2018 |
| | October 28, 2017 1 |
|
Cash provided by operating activities | $ | 1,450,072 |
| | $ | 1,165,686 |
|
Cash used in investing activities | (292,627 | ) | | (266,863 | ) |
Cash used in financing activities | (1,099,128 | ) | | (867,066 | ) |
Net increase in cash, cash equivalents, and restricted cash and cash equivalents | $ | 58,317 |
| | $ | 31,757 |
|
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 $1,450.1$1,410.9 million and $1,165.7$1,450.1 million for the nine month periods ended November 2, 2019 and November 3, 2018, and October 28, 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 increasedecrease in cash flow from operating activities for the nine month period ended November 3, 2018,2, 2019, compared to the same period in the prior year was primarily driven by higher earnings andthe timing of merchandise receipts and related payments associated with higher inventory receipts. Accountsversus last year, partially offset by higher net earnings. The timing of merchandise receipts and related payments versus last year resulted in accounts payable leverage (defined as accounts payable divided by merchandise inventory) was 70%of 68%, 65%67%, and 70% as of November 2, 2019, February 2, 2019, and November 3, 2018, February 3, 2018, and October 28, 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 November 3, 2018,2, 2019, packaway inventory was 41%39% of total inventory compared to 49%46% at the end of fiscal 2017.2018. As of October 28, 2017,November 3, 2018, packaway inventory was 46%41% of total inventory compared to 49% at the end of fiscal 2016.2017.
Investing Activities
Net cash used in investing activities was $292.6$400.7 million and $266.9$292.6 million for the nine month periods ended November 2, 2019 and November 3, 2018, and October 28, 2017, respectively. The increase in cash used for investing activities for the nine month period ended November 3, 20182, 2019 compared to the nine month period ended October 28, 2017November 3, 2018 was primarily due to an increase in our capital expenditures.
Our capital expenditures were $293.4$401.3 million and $266.9$293.4 million for the nine month periods ended November 2, 2019 and November 3, 2018, and October 28, 2017, respectively. Our capital expenditures include costs to build, expand, and improve distribution centers; 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 $440$580 million in capital expenditures for fiscal year 20182019 to fund initial investments in our next distribution center, 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 flowsflow from operations.
Financing Activities
Net cash used in financing activities was $1,099.1$1,284.7 million and $867.1$1,099.1 million for the nine month periods ended November 2, 2019 and November 3, 2018, and October 28, 2017, respectively. For the nine month periods ended November 2, 2019 and November 3, 2018, and October 28, 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 nine month period ended November 3, 2018,2, 2019, compared to the nine month period ended October 28, 2017,November 3, 2018, was primarily due to an increase in the repurchase of our common stock under our stock repurchase program and higher cash dividends.
We repurchased 9.49.6 million and 10.59.4 million shares of common stock for aggregate purchase prices of approximately $806.5 million$965.9 millions and $648.8$806.5 million during the nine month periods ended November 2, 2019 and November 3, 2018, and October 28, 2017, respectively. We also acquired 0.70.6 million and 0.7 million shares of treasury stock under our employee stock equity compensation programs, for aggregate purchase prices of approximately $53.7$56.9 million and $45.4$53.7 million during the nine month periods ended November 2, 2019 and November 3, 2018, and October 28, 2017, respectively. In March 2018,2019, our Board of Directors approved an increase in thea new, two-year $2.55 billion stock repurchase authorization forprogram through fiscal 2018 by $200 million to $1.075 billion, up from the previously available $875 million.2020.
For the nine month periods ended November 2, 2019 and November 3, 2018, and October 28, 2017, we paid cash dividends of $253.9$278.4 million and $186.5$253.9 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 2018.2019.
We haveIn July 2019, we entered into a $600new $800 million unsecured revolving credit facility, which replaced our previous $600 million unsecured revolving credit facility. This new credit facility expires in April 2021,July 2024, 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).credit. The facility also contains an option allowing us to increase the size of our credit facility by up to an additional $200$300 million, with the agreement of the lenders. Interest on any borrowings under this facility is based on LIBOR (or an alternate benchmark rate, if LIBOR is no longer available) plus an applicable margin (currently 10075 basis points) and is payable quarterly and upon maturity. The revolving credit facility may be extended, at our option, for up to two additional one-year periods, subject to customary conditions. As of November 3, 2018,2, 2019, we had no borrowings or standby letters of credit outstanding under this facility and the $600$800 million credit facility remains in place and available.
The revolving credit facility is subject to a financial leverage ratio covenant. As of November 3, 2018,2, 2019, 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 twelve12 months.
Contractual Obligations and Off-Balance Sheet Arrangements
The table below presents our significant contractual obligations as of November 3, 2018:2, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($000) | Less than one year | | 1 - 3 years | | 3 - 5 years | | After 5 years | | Total¹ |
| | | | | | | | | |
Recorded contractual obligations: | | | | | | | | | |
Senior notes | $ | — | | | $ | 65,000 | | | $ | 250,000 | | | $ | — | | | $ | 315,000 | |
Operating leases | 598,139 | | | 1,150,682 | | | 803,555 | | | 704,245 | | | 3,256,621 | |
New York buying office ground lease2 | 5,883 | | | 13,059 | | | 14,178 | | | 949,299 | | | 982,419 | |
Unrecorded contractual obligations: | | | | | | | | | |
Real estate obligations3 | 10,185 | | | 36,880 | | | 36,969 | | | 113,291 | | | 197,325 | |
Interest payment obligations | 12,682 | | | 23,242 | | | 16,875 | | | — | | | 52,799 | |
Purchase obligations4 | 2,974,646 | | | 59,115 | | | 4,503 | | | — | | | 3,038,264 | |
Total contractual obligations | $ | 3,601,535 | | | $ | 1,347,978 | | | $ | 1,126,080 | | | $ | 1,766,835 | | | $ | 7,842,428 | |
|
| | | | | | | | | | | | | | | | | | | |
($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 |
| | 8,438 |
| | 68,193 |
|
Operating leases (rent obligations) | 550,349 |
| | 1,045,131 |
| | 729,416 |
| | 648,218 |
| | 2,973,114 |
|
New York buying office ground lease² | 6,417 |
| | 12,835 |
| | 13,691 |
| | 934,065 |
| | 967,008 |
|
Purchase obligations | 2,900,983 |
| | 46,753 |
| | 10,199 |
| | 1,231 |
| | 2,959,166 |
|
Total contractual obligations | $ | 3,558,143 |
| | $ | 1,130,083 |
| | $ | 837,303 |
| | $ | 1,841,952 |
| | $ | 7,367,481 |
|
1We have a $129.7$82.3 millionliability 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, except for the subsequent event item discloseddiscussed in Note F.G.
²Our New York buying office building is subject to a 99-year ground lease.
3 Minimum lease payments for leases signed that have not yet commenced.
4 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.
Other than the unrecorded contractual obligations noted above, we do not have any material off-balance sheet arrangements as of November 2, 2019.
Senior notes. As of November 3, 2018,2, 2019, 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 November 3, 2018,2, 2019, we also had outstanding two other series ofSeries B unsecured senior notes in the aggregate principal amount of $150$65 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 notesSenior Notes are subject to certain financial covenants, including interest coverage and other financial ratios. As of November 3, 2018,2, 2019, 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 103,000 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 November 3, 2018, we had purchase obligations of approximately $3.0 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 November 2, 2019, February 2, 2019, and November 3, 2018,, February 3, 2018, and October 28, 2017, we had $4.6 million, $7.3 million, $8.7 million, and $10.4$7.3 million, respectively, in standby letters of credit outstanding and $57.9$56.2 million,
$57.1 $58.3 million and $56.9$57.9 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 $25.4$23.5 million, $20.7$13.3 million, and $29.9$25.4 million in trade letters of credit outstanding at November 2, 2019, February 2, 2019, and November 3, 2018,, February 3, 2018, and October 28, 2017, respectively.
Dividends. In November 2018,2019, our Board of Directors declared a cash dividend of $0.225$0.255 per common share, payable on December 28, 2018.31, 2019.
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 third quarterOther than changes to our lease accounting policies as a result of fiscal 2018,adoption of Accounting Standards Update ("ASU") No. 2016-02, Leases (AccountingStandards Codification "ASC" 842)described below, 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, 2018.2, 2019.
Effective February 4, 2018,As our leases generally do not provide an implicit discount rate, we adopteduse the requirementsestimated collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contractslease payments for use in the calculation of the lease liabilities and right-of-use assets. This rate is determined using a portfolio approach based on the risk-adjusted rate of interest that we would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar lease term. Operating lease liabilities and corresponding right-of-use assets include options to extend lease terms that are reasonably certain of being exercised. We do not record a lease liability and corresponding right-of-use asset for leases with Customers (ASC 606)terms of 12 months or less, and ASU No. 2016-18, Statementaccount for lease and non-lease components as a single lease component. Our lease portfolio is comprised of operating leases with the lease cost recorded on a straight-line basis over the lease term.
Prior to the adoption of ASC 842, when a lease contained “rent holidays” or required fixed escalations of the minimum lease payments, we recorded rental expense on a straight-line basis over the term of the lease and the difference between the average rental amount was charged to expense and the amount payable under the lease was recorded as deferred rent. We began recording rent expense on the lease possession date. Tenant improvement allowances were amortized over the lease term. Changes in deferred rent and tenant improvement allowances were included as a component of operating activities in the Condensed Consolidated Statements of Cash Flows, Restricted Cash. Flows.
See Note A - Summary of Significant Accounting Policies (Recently Adopted Accounting Standards) and Note E - Leases in the notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding our adoption of ASC 606 and ASU No. 2016-18 and recently issued accounting standards.842.
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:
•Competitive pressures in the apparel and home-related merchandise retailing industry, which are high.
•Unexpected changes in the level of consumer spending on or preferences for apparel and home-related merchandise, which could adversely affect us.
•Unseasonable weather that may affect shopping patterns and consumer demand for seasonal apparel and other merchandise.
•Impacts from the macro-economic environment, financial and credit markets, and geopolitical conditions that affect consumer confidence and consumer disposable income.
•Our need to effectively manage our inventories, markdowns, and inventory shortage in order to achieve our planned gross margins.
•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.
•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.
•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.
•Our need to obtain acceptable new store sites with favorable consumer demographics to achieve our planned growth.
•Our need to expand in existing markets and enter new geographic markets in order to achieve growth.
•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.
•An adverse outcome in various legal, regulatory, or tax matters that could increase our costs.
•Damage to our corporate reputation or brands that could adversely affect our sales and operating results.
•Our need to continually attract, train, and retain associates with the retail talent necessary to execute our off-price retail strategies.
•Our need to effectively advertise and market our business.
•Risks associated with selling and importing merchandise produced in other countries.
•Changes in U.S. tax, tariff, or tarifftrade policy regarding apparel and home-related merchandise produced in other countries, which could adversely affect our business.
•Possible volatility in our revenues and earnings.
•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.
•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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, which primarily include changes in interest rates. We do not engage in financial transactions for trading or speculative purposes.
We may occasionally use forward contracts to hedge against fluctuations in foreign currency prices. We had no outstanding forward contracts as of November 3, 2018.2, 2019.
Interest that is payable on our revolving credit facility is based on variable interest rates and is, therefore, affected by changes in market interest rates. As of November 3, 2018,2, 2019, we had no borrowings outstanding under our revolving credit facility.
WeAs of November 2, 2019, we have two outstanding series of unsecured notes held by institutional investors: Series A Senior Notes due December 2018 for $85 million accrue interest at 6.38% and6.53% Series B Senior Notes due December 2021 forwith an aggregate principal amount of $65 million, accrue interest at 6.53%. The amount outstanding under these notes as of November 3, 2018 was $150 million. We also haveand unsecured 3.375% Senior Notes due September 2024 with an aggregate principal amount of $250 million. Interest that is payable on both series of our senior notesSenior Notes is based on fixed interest rates, and is therefore unaffected by changes in market interest rates.
Interest is receivable on our short- and long-term investments. Changes in interest rates may impact interest income recognized in the future, or the fair value of our investment portfolio.
A hypothetical 100 basis point increase or decrease in prevailing market interest rates would not have a material impact on our consolidated financial position, results of operations, cash flows, or the fair values of our short- and long-term investments as of and for the three month or nine month periods ended November 3, 2018.2, 2019. We do not consider the potential losses in future earnings and cash flows from reasonably possible, near-term changes in interest rates to be material.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at that reasonable assurance level as of the end of the period covered by this report.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.
Quarterly Evaluation of Changes in Internal Control Over Financial Reporting
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any change occurred during the third fiscal quarter of 20182019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, our management concluded that there was no such change during the 20182019 third fiscal quarter.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The matters under the caption “Litigation, claims, and assessments” in Note A of Notes to Condensed Consolidated Financial Statements are incorporated herein by reference.
ITEM 1A. RISK FACTORS
See Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 3, 20182, 2019 for a description of the risks and uncertainties associated with our business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Information regarding shares of common stock we repurchased during the third quarter of fiscal 20182019 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Total number of shares (or units) purchased1 | | Average price paid per share (or unit) | | Total number of shares (or units) purchased as part of publicly announced plans or programs | | Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs ($000)2 |
| Period | | | | | | | |
| August | | | | | | | |
| (8/04/2019 - 8/31/2019) | 807,580 | | | $104.25 | | 794,524 | | | $1,826,948 |
| September | | | | | | | |
| (9/01/2019 - 10/05/2019) | 1,254,035 | | | $108.17 | | 1,224,791 | | | $1,694,481 |
| October | | | | | | | |
| (10/06/2019 - 11/02/2019) | 996,215 | | | $110.81 | | 996,215 | | | $1,584,091 |
| Total | 3,057,830 | | | $107.99 | | 3,015,530 | | | $1,584,091 |
|
| | | | | | | | | |
| Total number of shares (or units) purchased1 |
| | Average price paid per share (or unit) | | Total number of shares (or units) purchased as part of publicly announced plans or programs |
| | Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs ($000)2 |
Period | | | |
August | | | | | | | |
(8/05/2018 - 9/01/2018) | 768,609 |
| | $92.56 | | 763,468 |
| | $475,763 |
September | | | | | | | |
(9/02/2018 - 10/06/2018) | 1,181,301 |
| | $97.38 | | 1,160,738 |
| | $362,710 |
October | | | | | | | |
(10/07/2018 - 11/03/2018) | 972,648 |
| | $97.01 | | 971,118 |
| | $268,500 |
Total | 2,922,558 |
| | $95.99 | | 2,895,324 |
| | $268,500 |
1We acquired 27,23442,300 shares of treasury stock during the quarter ended November 3, 2018.2, 2019. Treasury stock includes shares acquired from employees for tax withholding purposes related to vesting of restricted stock grants. All remaining shares were repurchased under our publicly announced stock repurchase program.
2In February 2017,March 2019, our Board of Directors approved a two-year $1.75$2.55 billion stock repurchase program through fiscal 2018. Repurchases of $875 million were completed during fiscal 2017. In March 2018, our Board of Directors approved a $200 million increase in the stock repurchase authorization, bringing the authorization for fiscal 2018 to $1.075 billion.
2020.
ITEM 6. EXHIBITS
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3.1 | | |
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3.2 | | |
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1510.1 | | |
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10.2 | | |
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15 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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104 | Cover Page Interactive Data File. (The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | ROSS STORES, INC. | |
| | (Registrant) | |
| | | |
| | ROSS STORES, INC. | |
Date: | December 11, 2019 | (Registrant)By: | /s/Travis R. Marquette |
| | | Travis R. Marquette |
| | | |
Date: | December 12, 2018 | By: | /s/Michael J. Hartshorn |
| | | Michael J. Hartshorn |
| | | ExecutiveGroup Senior Vice President and ChiefFinancialOfficer, and Principal Accounting Officer
|