UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM 10-Q
(Mark one)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 2019
☐
For the quarterly period ended November 02, 2019
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission file number:0-14678


Ross Stores, Inc.
(Exact name of registrant as specified in its charter)
Delaware94-1390387
(State or other jurisdiction of incorporation or(I.R.S. Employer Identification No.)
organization)
 5130 Hacienda Drive,Dublin,
California
94568-7579
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code                   (925)(925)965-4400
Former name, former address and formerN/A
   fiscal year, if changed since last report.

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbolName of each exchange on which registered
 Common stock,par value $.01ROSTNasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý  Accelerated filer o Non-accelerated filer o Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ý☒

The number of shares of Common Stock, with $.01 par value, outstanding on August 21,November 20, 2019 was 361,730,420.358,882,342.

1

Ross Stores, Inc.
Form 10-Q
Table of Contents

Page
Page
PART I. FINANCIAL INFORMATION
Item 1.
3
4
5
6
Condensed Consolidated Statements of Stockholders' Equity–SixNine months ended AugustNovember 3, 2019 and August 4, 2018
6
7
78
89
1819
Item 2.
1920
Item 3.
2728
Item 4.
2728
Item 1.
2829
Item 1A.
2829
Item 2.
2829
Item 6.
2930
3031


2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Statements of Earnings

Three Months Ended Six Months EndedThree Months EndedNine Months Ended
($000, except stores and per share data, unaudited)August 3, 2019

August 4, 2018
 August 3, 2019
 August 4, 2018
($000, except stores and per share data, unaudited)November 2, 2019November 3, 2018November 2, 2019November 3, 2018
Sales$3,979,869
 $3,737,926
 $7,776,511
 $7,326,545
Sales$3,849,117  $3,549,608  $11,625,628  $10,876,153  
       
Costs and Expenses       Costs and Expenses
Cost of goods sold2,843,850
 2,666,983
 5,545,518
 5,189,202
Cost of goods sold2,766,432  2,547,331  8,311,950  7,736,533  
Selling, general and administrative591,970
 554,581
 1,150,220
 1,079,004
Selling, general and administrative604,605  561,577  1,754,825  1,640,581  
Interest income, net(4,782) (1,393) (10,417) (1,896)Interest income, net  (4,402) (2,953) (14,819) (4,849) 
Total costs and expenses3,431,038
 3,220,171
 6,685,321
 6,266,310
Total costs and expenses3,366,635  3,105,955  10,051,956  9,372,265  
       
Earnings before taxes548,831
 517,755
 1,091,190
 1,060,235
Earnings before taxes482,482  443,653  1,573,672  1,503,888  
Provision for taxes on earnings136,110
 128,351
 257,327
 252,579
Provision for taxes on earnings111,550  105,545  368,877  358,124  
Net earnings$412,721
 $389,404
 $833,863
 $807,656
Net earnings$370,932  $338,108  $1,204,795  $1,145,764  
       
Earnings per share       Earnings per share
Basic$1.15
 $1.05
 $2.31
 $2.17
Basic$1.04  $0.92  $3.35  $3.09  
Diluted$1.14
 $1.04
 $2.29
 $2.15
Diluted$1.03  $0.91  $3.32  $3.06  
       
       
Weighted average shares outstanding (000)       Weighted average shares outstanding (000)
Basic359,794
 371,031
 361,439
 372,414
Basic356,879  368,102  359,919  370,977  
Diluted362,074
 373,717
 364,007
 375,336
Diluted359,299  371,061  362,455  373,936  
       
       
Stores open at end of period1,772
 1,680
 1,772
 1,680
Stores open at end of period1,810  1,720  1,810  1,720  
The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Condensed Consolidated Statements of Comprehensive Income

Three Months Ended Six Months EndedThree Months EndedNine Months Ended
($000, unaudited)August 3, 2019
 August 4, 2018
 August 3, 2019
 August 4, 2018
($000, unaudited)November 2, 2019November 3, 2018November 2, 2019November 3, 2018
Net earnings$412,721
 $389,404
 $833,863
 $807,656
Net earnings$370,932  $338,108  $1,204,795  $1,145,764  
       
Other comprehensive (loss) income:       Other comprehensive (loss) income:
Change in unrealized gain (loss) on investments, net of tax—
 (3) —
 (23)Change in unrealized gain (loss) on investments, net of tax—  (4) —  (27) 
Comprehensive income$412,721
 $389,401
 $833,863
 $807,633
Comprehensive income$370,932  $338,104  $1,204,795  $1,145,737  
The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Condensed Consolidated Balance Sheets

($000, except share data, unaudited)August 3, 2019
 February 2, 2019
 August 4, 2018
($000, except share data, unaudited)November 2, 2019February 2, 2019November 3, 2018
Assets     Assets
Current Assets     Current Assets
Cash and cash equivalents$1,382,025
 $1,412,912
 $1,386,935
Cash and cash equivalents$1,142,709  $1,412,912  $1,349,196  
Accounts receivable130,439
 96,711
 121,508
Accounts receivable124,853  96,711  117,825  
Merchandise inventory1,835,869
 1,750,442
 1,698,390
Merchandise inventory2,168,796  1,750,442  1,979,080  
Prepaid expenses and other167,585
 143,954
 172,822
Prepaid expenses and other170,304  143,954  177,206  
Total current assets3,515,918
 3,404,019
 3,379,655
Total current assets3,606,662  3,404,019  3,623,307  
     
Property and Equipment     Property and Equipment
Land and buildings1,162,269
 1,126,051
 1,117,895
Land and buildings1,173,131  1,126,051  1,117,801  
Fixtures and equipment2,886,275
 2,783,198
 2,660,388
Fixtures and equipment3,032,151  2,783,198  2,719,545  
Leasehold improvements1,162,935
 1,175,921
 1,117,648
Leasehold improvements1,199,591  1,175,921  1,150,142  
Construction-in-progress200,012
 171,538
 142,708
Construction-in-progress145,756  171,538  146,323  
5,411,491
 5,256,708
 5,038,639
 5,550,629  5,256,708  5,133,811  
Less accumulated depreciation and amortization2,906,451
 2,781,507
 2,654,338
Less accumulated depreciation and amortization2,984,747  2,781,507  2,715,585  
Property and equipment, net2,505,040
 2,475,201
 2,384,301
Property and equipment, net2,565,882  2,475,201  2,418,226  
     
Operating lease assets2,932,199
 —
 —
Operating lease assets3,042,298  —  —  
Other long-term assets198,790
 194,471
 199,800
Other long-term assets200,999  194,471  194,234  
Total assets$9,151,947
 $6,073,691
 $5,963,756
Total assets$9,415,841  $6,073,691  $6,235,767  
     
Liabilities and Stockholders’ Equity     Liabilities and Stockholders’ Equity
Current Liabilities     Current Liabilities
Accounts payable$1,359,829
 $1,177,104
 $1,184,422
Accounts payable$1,480,205  $1,177,104  $1,394,029  
Accrued expenses and other474,273
 431,596
 427,875
Accrued expenses and other496,623  431,596  455,743  
Current operating lease liabilities549,841
 —
 —
Current operating lease liabilities559,433  —  —  
Accrued payroll and benefits295,465
 363,035
 280,861
Accrued payroll and benefits321,977  363,035  317,525  
Income taxes payable—
 37,749
 —
Income taxes payable—  37,749  —  
Current portion of long-term debt—
 —
 84,989
Current portion of long-term debt—  —  84,997  
Total current liabilities2,679,408
 2,009,484
 1,978,147
Total current liabilities2,858,238  2,009,484  2,252,294  
     
Long-term debt312,665
 312,440
 312,217
Long-term debt312,778  312,440  312,328  
Non-current operating lease liabilities2,496,230
 —
 —
Non-current operating lease liabilities2,601,372  —  —  
Other long-term liabilities227,842
 321,713
 374,587
Other long-term liabilities225,934  321,713  371,844  
Deferred income taxes139,538
 124,308
 114,195
Deferred income taxes140,740  124,308  112,138  
     
Commitments and contingencies


 


 


Commitments and contingencies
     
Stockholders’ Equity     Stockholders’ Equity
Common stock, par value $.01 per share
Authorized 1,000,000,000 shares
Issued and outstanding 362,166,000, 368,242,000
and 373,868,000 shares, respectively		3,622
 3,682
 3,739
Common stock, par value $.01 per share
Authorized 1,000,000,000 shares
Issued and outstanding 359,378,000, 368,242,000
and 371,058,000 shares, respectively
Common stock, par value $.01 per share
Authorized 1,000,000,000 shares
Issued and outstanding 359,378,000, 368,242,000
and 371,058,000 shares, respectively
3,594  3,682  3,711  
Additional paid-in capital1,412,976
 1,375,965
 1,333,329
Additional paid-in capital1,435,713  1,375,965  1,354,669  
Treasury stock(425,012) (372,663) (369,340)Treasury stock(429,583) (372,663) (371,959) 
Accumulated other comprehensive income—
 —
 4
Retained earnings2,304,678
 2,298,762
 2,216,878
Retained earnings2,267,055  2,298,762  2,200,742  
Total stockholders’ equity3,296,264
 3,305,746
 3,184,610
Total stockholders’ equity3,276,779  3,305,746  3,187,163  
Total liabilities and stockholders’ equity$9,151,947
 $6,073,691
 $5,963,756
Total liabilities and stockholders’ equity$9,415,841  $6,073,691  $6,235,767  
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Condensed Consolidated Statements of Stockholders' Equity

Nine Months Ended November 2, 2019
Additional paid-in capitalAccumulated other comprehensive income (loss)
Common stockTreasury stockRetained earnings
(000)Shares  AmountTotal
Balance at February 2, 2019368,242  $3,682  $1,375,965  $(372,663) $—  $2,298,762  $3,305,746  
Net earnings—  —  —  —  —  421,142  421,142  
Cumulative effect of adoption of
accounting standard
(leases), net—  —  —  —  —  (19,614) (19,614) 
Common stock issued under stock
plans, net of shares
used for tax withholding390  4  5,291  (50,880) —  —  (45,585) 
Stock-based compensation—  —  19,689  —  —  —  19,689  
Common stock repurchased(3,372) (33) (9,387) —  —  (310,710) (320,130) 
Dividends declared ($0.255 per share)—  —  —  —  —  (93,722) (93,722) 
Balance at May 4, 2019365,260  $3,653  $1,391,558  $(423,543) $—  $2,295,858  $3,267,526  
Net earnings—  —  —  —  —  412,721  412,721  
Common stock issued under stock
plans, net of shares
used for tax withholding98  1  5,610  (1,469) —  —  4,142  
Stock-based compensation—  —  24,924  —  —  —  24,924  
Common stock repurchased(3,192) (32) (9,116) —  —  (310,981) (320,129) 
Dividends declared ($0.255 per share)—  —  —  —  —  (92,920) (92,920) 
Balance at August 3, 2019362,166  $3,622  $1,412,976  $(425,012) $—  $2,304,678  $3,296,264  
Net earnings—  —  —  —  —  370,932  370,932  
Common stock issued under stock
plans, net of shares
used for tax withholding227  2  5,543  (4,571) —  —  974  
Stock-based compensation—  —  25,987  —  —  —  25,987  
Common stock repurchased(3,015) (30) (8,793) —  —  (316,827) (325,650) 
Dividends declared ($0.255 per share)—  —  —  —  —  (91,728) (91,728) 
Balance at November 2, 2019359,378  $3,594  $1,435,713  $(429,583) $—  $2,267,055  $3,276,779  
The accompanying notes are an integral part of these condensed consolidated financial statements.


6

Condensed Consolidated Statements of Stockholders' EquityCondensed Consolidated Statements of Stockholders' Equity
 Six Months Ended August 3, 2019Nine Months Ended November 3, 2018
     Additional paid-in capital
   Accumulated other comprehensive income (loss)
    Additional paid-in capitalAccumulated
other comprehensive income (loss)
 Common stock Treasury stock
 Retained earnings
  Common stockTreasury stockRetained earnings
(000) Shares  
 Amount
 Accumulated other comprehensive income (loss)
Total
(000)Shares  AmountTotal
Balance at February 2, 2019 368,242
 $3,682
 $1,375,965
 $(372,663) $—
$2,298,762
3,305,746
Balance at February 3, 2018Balance at February 3, 2018379,618  $3,796  $1,292,364  $(318,279) $27  $2,071,400  $3,049,308  
Net earnings —
 —
 —
 —
 —
 421,142
 421,142
Net earnings—  —  —  —  —  418,252  418,252  
Cumulative effect of adoption of              Cumulative effect of adoption of
accounting standard              accounting standard
(leases), net —
 —
 —
 —
 —
 (19,614) (19,614)
(revenue recognition), net(revenue recognition), net—  —  —  —  —  19,884  19,884  
Unrealized investment loss, net
Unrealized investment loss, net
—  —  —  —  (20) —  (20) 
Common stock issued under stock              Common stock issued under stock
plans, net of shares              plans, net of shares
used for tax withholding 390
 4
 5,291
 (50,880) —
 —
 (45,585)used for tax withholding732  8  4,674  (44,798) —  —  (40,116) 
Stock-based compensation —
 —
 19,689
 —
 —
 —
 19,689
Stock-based compensation—  —  23,760  —  —  —  23,760  
Common stock repurchased (3,372) (33) (9,387) —
 —
 (310,710) (320,130)Common stock repurchased(3,271) (33) (8,093) —  —  (247,244) (255,370) 
Dividends declared ($0.255 per share) —
 —
 —
 —
 —
 (93,722) (93,722)
Balance at May 4, 2019 365,260
 $3,653
 $1,391,558
 $(423,543) $—
 $2,295,858
 $3,267,526
Dividends declared ($0.225 per share)Dividends declared ($0.225 per share)—  —  —  —  —  (85,410) (85,410) 
Balance at May 5, 2018Balance at May 5, 2018377,079  $3,771  $1,312,705  $(363,077) $7  $2,176,882  $3,130,288  
Net earnings —
 —
 —
 —
 —
 412,721
 412,721
Net earnings—  —  —  —  —  389,404  389,404  
Unrealized investment loss, netUnrealized investment loss, net—  —  —  —  (3) —  (3) 
Common stock issued under stock              Common stock issued under stock
plans, net of shares              plans, net of shares
used for tax withholding 98
 1
 5,610
 (1,469) —
 —
 4,142
used for tax withholding20  —  5,135  (6,263) —  —  (1,128) 
Stock-based compensation —
 —
 24,924
 —
 —
 —
 24,924
Stock-based compensation—  —  23,820  —  —  —  23,820  
Common stock repurchased (3,192) (32) (9,116) —
 —
 (310,981) (320,129)Common stock repurchased(3,231) (32) (8,331) —  —  (264,847) (273,210) 
Dividends declared ($0.255 per share) —
 —
 —
 —
 —
 (92,920) (92,920)
Balance at August 3, 2019 362,166
 $3,622
 $1,412,976
 $(425,012) $—
 $2,304,678
 $3,296,264
Dividends declared ($0.225 per share)Dividends declared ($0.225 per share)—  —  —  —  —  (84,561) (84,561) 
Balance at August 4, 2018Balance at August 4, 2018373,868  $3,739  $1,333,329  $(369,340) $4  $2,216,878  $3,184,610  
Net earningsNet earnings—  —  —  —  —  338,108  338,108  
Unrealized investment loss, netUnrealized investment loss, net—  —  —  —  (4) —  (4) 
Common stock issued under stockCommon stock issued under stock
plans, net of sharesplans, net of shares
used for tax withholdingused for tax withholding85  1  5,097  (2,619) —  —  2,479  
Stock-based compensationStock-based compensation—  —  23,782  —  —  —  23,782  
Common stock repurchasedCommon stock repurchased(2,895) (29) (7,539) —  —  (270,352) (277,920) 
Dividends declared ($0.225 per share)Dividends declared ($0.225 per share)—  —  —  —  —  (83,892) (83,892) 
Balance at November 3, 2018Balance at November 3, 2018371,058  $3,711  $1,354,669  $(371,959) $—  $2,200,742  $3,187,163  
The accompanying notes are an integral part of these condensed consolidated financial statements.The accompanying notes are an integral part of these condensed consolidated financial statements.

7

  Six Months Ended August 4, 2018
      Additional paid-in capital
   Accumulated
other comprehensive income (loss)
    
  Common stock  Treasury stock
  Retained earnings
  
(000) Shares  
 Amount
     Total
Balance at February 3, 2018 379,618
 $3,796
 $1,292,364
 $(318,279) $27
 $2,071,400
 $3,049,308
Net earnings —
 —
 —
 —
 —
 418,252
 418,252
Cumulative effect of adoption of              
accounting standard              
(revenue recognition), net —
 —
 —
 —
 —
 19,884
 19,884
Unrealized investment loss, net

 —
 —
 —
 —
 (20) —
 (20)
Common stock issued under stock              
plans, net of shares              
used for tax withholding 732
 8
 4,674
 (44,798) —
 —
 (40,116)
Stock-based compensation —
 —
 23,760
 —
 —
 —
 23,760
Common stock repurchased (3,271) (33) (8,093) —
 —
 (247,244) (255,370)
Dividends declared ($0.225 per share) —
 —
 —
 —
 —
 (85,410) (85,410)
Balance at May 5, 2018 377,079
 $3,771
 $1,312,705
 $(363,077) $7
 $2,176,882
 $3,130,288
Net earnings —
 —
 —
 —
 —
 389,404
 389,404
Unrealized investment loss, net —
 —
 —
 —
 (3) —
 (3)
Common stock issued under stock             

plans, net of shares             

used for tax withholding 20
 —
 5,135
 (6,263) —
 —
 (1,128)
Stock-based compensation —
 —
 23,820
 —
 —
 —
 23,820
Common stock repurchased (3,231) (32) (8,331) —
 —
 (264,847) (273,210)
Dividends declared ($0.225 per share) —
 —
 —
 —
 —
 (84,561) (84,561)
Balance at August 4, 2018 373,868
—
$3,739
—
$1,333,329
—
$(369,340)—
$4
—
$2,216,878
—
$3,184,610
The accompanying notes are an integral part of these condensed consolidated financial statements.  


Condensed Consolidated Statements of Cash Flows
 Six Months Ended
($000, unaudited)August 3, 2019
 August 4, 2018
Cash Flows From Operating Activities   
Net earnings$833,863
 $807,656
Adjustments to reconcile net earnings to net cash provided
by operating activities:
   
Depreciation and amortization166,898
 162,403
Stock-based compensation44,613
 47,580
Deferred income taxes21,868
 21,664
Change in assets and liabilities:   
Merchandise inventory(85,427) (56,654)
Other current assets(55,309) (64,754)
Accounts payable187,050
 122,008
Other current liabilities(8,529) (29,348)
Income taxes(31,193) (1,619)
Operating lease assets and liabilities, net8,276
 —
Other long-term, net1,353
 5,248
Net cash provided by operating activities1,083,463
 1,014,184
    
Cash Flows From Investing Activities   
Additions to property and equipment(250,314) (178,635)
Proceeds from investments517
 505
Net cash used in investing activities(249,797) (178,130)
    
Cash Flows From Financing Activities   
Issuance of common stock related to stock plans10,906
 9,817
Treasury stock purchased(52,349) (51,061)
Repurchase of common stock(640,259) (528,580)
Dividends paid(186,642) (169,971)
Net cash used in financing activities(868,344) (739,795)
    
Net (decrease) increase in cash, cash equivalents, and restricted cash and cash equivalents(34,678) 96,259
    
Cash, cash equivalents, and restricted cash and cash equivalents:   
Beginning of period1,478,079
 1,353,272
End of period$1,443,401
 $1,449,531
    
Supplemental Cash Flow Disclosures   
Interest paid$6,341
 $9,053
Income taxes paid$266,653
 $232,528

Nine Months Ended
($000, unaudited)November 2, 2019November 3, 2018
Cash Flows From Operating Activities
Net earnings$1,204,795  $1,145,764  
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization255,089  246,151  
Stock-based compensation70,600  71,361  
Deferred income taxes23,070  19,607  
Change in assets and liabilities:
Merchandise inventory(418,354) (337,345) 
Other current assets(46,161) (62,081) 
Accounts payable305,648  328,062  
Other current liabilities43,968  35,758  
Income taxes(42,619) (5,338) 
Operating lease assets and liabilities, net12,911  —  
Other long-term, net1,983  8,133  
Net cash provided by operating activities1,410,930  1,450,072  
Cash Flows From Investing Activities
Additions to property and equipment(401,251) (293,366) 
Proceeds from investments517  739  
Net cash used in investing activities(400,734) (292,627) 
Cash Flows From Financing Activities
Issuance of common stock related to stock plans16,451  14,915  
Treasury stock purchased(56,920) (53,680) 
Repurchase of common stock(965,909) (806,500) 
Dividends paid(278,370) (253,863) 
Net 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  
Cash, cash equivalents, and restricted cash and cash equivalents:
Beginning of period1,478,079  1,353,272  
End of period$1,203,527  $1,411,589  
Supplemental Cash Flow Disclosures
Interest paid$10,560  $13,271  
Income taxes paid$388,426  $343,848  
The accompanying notes are an integral part of these condensed consolidated financial statements.




8

Notes to Condensed Consolidated Financial Statements

Three and SixNine Months Ended AugustNovember 2, 2019 and November 3, 2019 and August 4, 2018
(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 AugustNovember 2, 2019 and November 3, 2019 and August 4, 2018,, the results of operations, comprehensive income, and stockholders' equity for the three and sixnine month periods ended August 3,November 2, 2019 and August 4,November 3, 2018, and cash flows for the sixnine month periods ended AugustNovember 2, 2019 and November 3, 2019 and August 4, 2018.2018. The Condensed Consolidated Balance Sheet as of February 2, 2019,, 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 2, 20192019.
.

The results of operations, comprehensive income, and stockholders' equity for the three and sixnine month periods ended AugustNovember 2, 2019 and November 3, 2019 and August 4, 2018 and cash flows for the sixnine month periods ended August 3,November 2, 2019 and August 4,November 3, 2018 presented herein are not necessarily indicative of the results to be expected for the full fiscal year.

Recently adopted accounting standards. In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Accounting Standards Codification "ASC" 842), which along with subsequent amendments, supersedes the lease accounting requirements in ASC 840, Leases. The updated guidance 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.

The Company adopted ASC 842 as of February 3, 2019 (the "effective date"), using the optional transition method on a modified retrospective basis. The Company did not elect the transitional package of practical expedients or the use of hindsight upon adoption of the ASC. The Company elected to not record a lease liability and corresponding right-of-use asset for leases with terms of 12 months or less, and to account for lease and non-lease components as a single lease component. Upon adoption, the Company recorded lease liabilities based on the present value of the remaining minimum rental payments, using discount rates as of the effective date, of $2.9 billion, and the corresponding right-of-use assets of $2.9 billion. The Company also recorded a cumulative-effect adjustment to decrease beginning retained earnings of $19.6 million,, primarily related to the write-off of previously capitalized initial direct costs that are no longer capitalized under ASC 842, partially offset by the write-off of the deferred gain on a previous sale-leaseback transaction that meets the sale definition under ASC 842. Reporting periods beginning on or after February 3, 2019 are presented under ASC 842, while prior period amounts and disclosures were not adjusted and continue to be reported under ASC 840. ASC 842 did not have a significant impact to the Company’s condensed consolidated statements of earnings or to the condensed consolidated statements of cash flows.

Significant accounting policies. Except for the updates to accounting policies for leases as a result of adopting ASC 842 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 2, 2019.



Leases. As the Company’s leases generally do not provide an implicit discount rate, the Company uses the estimated collateralized incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease 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 the Company 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. The Company does not record a lease liability and corresponding right-of-use asset for leases with terms of 12 months or
9

less, and accounts for lease and non-lease components as a single lease component. The Company's 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, the Company 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. The Company 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.

Revenue recognition. The following sales mix table disaggregates revenue by merchandise category for the three and sixnine month periods ended August 3,November 2, 2019 and August 4,November 3, 2018:

 Three Months Ended Six Months Ended
 August 3, 2019
 August 4, 2018
 August 3, 2019
 August 4, 2018
Ladies27% 28% 27% 28%
Home Accents and Bed and Bath23% 24% 24% 24%
Shoes14% 14% 14% 14%
Men's15% 14% 14% 13%
Accessories, Lingerie, Fine Jewelry, and Fragrances13% 12% 13% 13%
Children's8% 8% 8% 8%
Total100% 100% 100% 100%

Three Months EndedNine Months Ended
November 2, 2019November 3, 2018November 2, 2019November 3, 2018
Ladies26 %27 %27 %28 %
Home Accents and Bed and Bath24 %25 %24 %24 %
Shoes14 %13 %14 %14 %
Men's14 %14 %14 %13 %
Accessories, Lingerie, Fine Jewelry, and Fragrances13 %13 %13 %13 %
Children's9 %8 %8 %8 %
Total100 %100 %100 %100 %

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)November 2, 2019February 2, 2019November 3, 2018
Cash and cash equivalents$1,142,709  $1,412,912  $1,349,196  
Restricted cash and cash equivalents included in:
  Prepaid expenses and other10,947  11,402  8,933  
  Other long-term assets49,871  53,765  53,460  
Total restricted cash and cash equivalents60,818  65,167  62,393  
Total cash, cash equivalents, and restricted cash and equivalents$1,203,527  $1,478,079  $1,411,589  
($000)August 3, 2019
 February 2, 2019
 August 4, 2018
Cash and cash equivalents$1,382,025
 $1,412,912
 $1,386,935
Restricted cash and cash equivalents included in:     
  Prepaid expenses and other11,048
 11,402
 8,961
  Other long-term assets50,328
 53,765
 53,635
Total restricted cash and cash equivalents61,376
 65,167
 62,596
Total cash, cash equivalents, and restricted cash and equivalents$1,443,401
 $1,478,079
 $1,449,531



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:

($000)August 3, 2019
 February 2, 2019
 August 4, 2018
Prepaid expenses and other$—
 $400
 $2,812
Total restricted investments$—
 $400
 $2,812

($000)November 2, 2019February 2, 2019November 3, 2018
Prepaid expenses and other$—  $400  $2,801  
Total restricted investments$—  $400  $2,801  

10

Property and equipment. As of AugustNovember 2, 2019 and November 3, 2019 and August 4, 2018,, the Company had $13.0$11.1 million and $10.0$13.0 million, respectively, of property and equipment purchased but not yet paid. These purchases are included in Property and Equipment, Accounts payable, and Accrued expenses and other in the accompanying Condensed Consolidated Balance Sheets.

Cash dividends. Dividends included in the Condensed Consolidated Statements of Cash Flows reflect cash dividends paid during the periods shown. Dividends per share reported on the Condensed Consolidated Statements of Earnings reflect cash dividends declared during the periods shown.

The Company’s Board of Directors declared a cash dividend of $0.255 per common share in March, May, and MayAugust 2019, and $0.225 per common share in March, May, August, and November 2018, respectively.

In AugustNovember 2019, the Company’s Board of Directors declared a cash dividend of $0.255 per common share, payable on September 30,December 31, 2019.

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 3, 2019.November 2, 2019.

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, environmental, 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. For the three and sixnine month periods ended August 3,November 2, 2019, the ASUs issued by the FASB were assessed and determined to be either not applicable or are expected to have minimal impact on the Company's condensed consolidated financial results.

Reclassifications. Certain items related to income taxes in the prior year’s condensed consolidated statements of cash flows have been reclassified to conform to the current year's presentation.






11

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 sixnine month periods ended August 3,November 2, 2019. The fair value of the Company’s financial instruments are as follows:

($000) August 3, 2019
 February 2, 2019
 August 4, 2018
Cash and cash equivalents (Level 1)
 $1,382,025
 $1,412,912
 $1,386,935
       
Restricted cash and cash equivalents (Level 1)
 $61,376
 $65,167
 $62,596
       
Investments (Level 2)
 $8
 $125
 $709
       
Restricted investments (Level 2)
 $—
 $400
 $2,812


($000)November 2, 2019February 2, 2019November 3, 2018
Cash and cash equivalents (Level 1)
$1,142,709  $1,412,912  $1,349,196  
Restricted cash and cash equivalents (Level 1)
$60,818  $65,167  $62,393  
Investments (Level 2)
$8  $125  $475  
Restricted investments (Level 2)
$—  $400  $2,801  

The underlying assets in the Company’s non-qualified deferred compensation program as of August 3,November 2, 2019,, February 2, 2019,, and August 4,November 3, 2018 (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 3, 2019
 February 2, 2019
 August 4, 2018
Level 1$126,377
 $114,181
 $117,274
Level 27,411
 10,377
 11,836
Total$133,788
 $124,558
 $129,110


($000)November 2, 2019February 2, 2019November 3, 2018
Level 1$129,461  $114,181  $111,490  
Level 27,409  10,377  12,218  
Total$136,870  $124,558  $123,708  


Note C: Stock-Based Compensation

Stock-based compensation. For the three and sixnine month periods ended August 3,November 2, 2019 and August 4,November 3, 2018, the Company recognized stock-based compensation expense as follows:

 Three Months Ended  Six Months Ended
($000)August 3, 2019
 August 4, 2018
  August 3, 2019
 August 4, 2018
Restricted stock$14,909
 $12,428
  $24,358
 $23,936
Performance awards9,025
 10,487
  18,329
 21,911
Employee stock purchase plan990
 905
  1,926
 1,733
Total$24,924
 $23,820
  $44,613
 $47,580

Three Months EndedNine Months Ended
($000)November 2, 2019November 3, 2018November 2, 2019November 3, 2018
Restricted stock$15,030  $12,288  $39,388  $36,224  
Performance awards9,979  10,594  28,308  32,504  
Employee stock purchase plan978  900  2,904  2,633  
Total$25,987  $23,782  $70,600  $71,361  


12

Total stock-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Earnings for the three and sixnine month periods ended August 3,November 2, 2019 and August 4,November 3, 2018, is as follows:

 Three Months Ended Six Months Ended
Statements of Earnings Classification ($000)August 3, 2019
 August 4, 2018
 August 3, 2019
 August 4, 2018
Cost of goods sold$13,812
 $11,011
 $26,934
 $22,047
Selling, general and administrative11,112
 12,809
 17,679
 25,533
Total$24,924
 $23,820
 $44,613
 $47,580

Three Months EndedNine Months Ended
Statements of Earnings Classification ($000)November 2, 2019November 3, 2018November 2, 2019November 3, 2018
Cost of goods sold$13,823  $11,434  $40,757  $33,481  
Selling, general and administrative12,164  12,348  29,843  37,880  
Total$25,987  $23,782  $70,600  $71,361  

The tax benefits related to stock-based compensation expense for the three and sixnine month periods ended August 3,November 2, 2019 were $5.0$5.5 million and $8.7$14.2 million, respectively. The tax benefits related to stock-based compensation expense for the three and sixnine month periods ended August 4,November 3, 2018 were $5.0$5.1 million and $9.9$15.0 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 sixnine month periods ended August 3,November 2, 2019 and August 4,November 3, 2018, shares purchased by the Company for tax withholding totaled 14,62742,300 and 570,624,612,924, and 78,15127,234 and 661,379,688,613, 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 3,November 2, 2019, shares related to unvested restricted stock and performance share awards totaled 4.34.4 million shares. A summary of restricted stock and performance share award activity for the sixnine month period ended August 3,November 2, 2019, is presented below:

(000, except per share data)
Number of
shares

 
Weighted
average
grant date
fair value

Unvested at February 2, 20195,130
 $62.50
Awarded1,052
 91.26
Released(1,609) 52.53
Forfeited(310) 70.17
Unvested at August 3, 20194,263
 $72.80

(000, except per share data)Number of
shares		Weighted
average
grant date
fair value
Unvested at February 2, 20195,130  $62.50  
Awarded1,288  93.87  
Released(1,712) 52.70  
Forfeited(332) 70.20  
Unvested at November 2, 20194,374  $74.99  

The unamortized compensation expense at August 3,November 2, 2019, was $165.2$169.6 million, which is expected to be recognized over a weighted-average remaining period of 2.32.2 years. The unamortized compensation expense at August 4,November 3, 2018, was $148.3$137.2 million, which was expected to be recognized over a weighted-average remaining period of 2.22.0 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.



13

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 and sixnine month periods ended August 3,November 2, 2019, approximately 10,50011,800 and 5,30019,100, respectively, weighted average shares were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive for the periods presented. For the three and nine month periodperiods ended August 4, 2018, 0 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 six month period ended August 4,November 3, 2018, approximately 7304,800 and 10,000, respectively, weighted average shares were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive for the period 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 3, 2019            
Shares359,794
 2,280
 362,074
  361,439
 2,568
 364,007
Amount$1.15
 $(0.01) $1.14
  $2.31
 $(0.02) $2.29
             
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


Three Months EndedNine Months Ended
Shares in (000s)Basic EPSEffect of
dilutive
common stock
equivalents		Diluted
EPS		Basic EPSEffect of
dilutive
common
stock
equivalents		Diluted
EPS
November 2, 2019
Shares356,879  2,420  359,299  359,919  2,536  362,455  
Amount$1.04  $(0.01) $1.03  $3.35  $(0.03) $3.32  
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  



14

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:
LocationLease Expiration Date
Leased Warehouses
Carlisle, Pennsylvania2020
Carlisle, Pennsylvania2021
Fort Mill, South Carolina2024
Rock Hill, South Carolina2028
Shafter, California2029
LocationThird-Party WarehousesLease Expiration Date
Leased Warehouses
Carlisle, Pennsylvania2020
Carlisle, Pennsylvania2021
Fort Mill, South Carolina20242020
Rock Hill, South Carolina2028
Shafter, California2029
Third-Party Warehouses
Fort Mill, South Carolina2020
Moreno Valley, California2023
Moreno Valley, California2029
Shafter, California2020


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 sixnine month periods ended August 3,November 2, 2019:

  Three Months EndedSix Months Ended
($000) August 3, 2019
August 3, 2019
Operating lease cost 1
 $159,648
$315,214
Variable lease costs 2
 43,872
86,786
Net lease cost 3
 $203,520
$402,000
    
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.
   

Three Months EndedNine Months Ended
($000) November 2, 2019November 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.



15

The maturity of operating lease liabilities, including the ground lease related to the New York buying office as of August 3,November 2, 2019, are as follows:

($000) 
Operating Leases 1

2020 $593,543
2021 600,160
2022 521,350
2023 438,964
2024 338,686
Thereafter 1,631,666
Total lease payments 4,124,369
Less: interest 1,078,298
Present value of lease liabilities $3,046,071
Less: current operating lease liabilities 549,841
Non-current operating lease liabilities $2,496,230
   
1 Operating lease payments exclude $211.9 million of minimum lease payments for leases signed that have not yet commenced.

($000) 
Operating Leases 1
2020$604,022  
2021616,088  
2022547,653  
2023461,997  
2024355,736  
Thereafter1,653,544  
Total lease payments4,239,040  
Less: interest1,078,235  
Present value of lease liabilities$3,160,805  
Less: current operating lease liabilities559,433  
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 August 3,November 2, 2019, the weighted-average remaining lease term and the weighted average discount rate for operating leases is 11.010.8 years and 3.6%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 3.3%3.2%, respectively.

Cash paid for amounts included in the measurement of operating lease liabilities was $153.6$152.1 million and $301.8$453.9 million, respectively, for the three and sixnine month periods ended August 3,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 sixnine month periods ended August 3,November 2, 2019 were $127.6$251.4 million and $335.4$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  
2020580,712  
2021499,678  
2022424,695  
2023339,340  
Thereafter1,575,673  
Total minimum lease payments$3,975,910  





16

Note F: Debt

Senior notes. Unsecured senior debt, net of unamortized discounts and debt issuance costs, consisted of the following:

($000) August 3, 2019
 February 2, 2019
 August 4, 2018
6.38% Series A Senior Notes due 2018 $—
 $—
 $84,989
6.53% Series B Senior Notes due 2021 64,953
 64,942
 64,933
3.375% Senior Notes due 2024 247,712
 247,498
 247,284
Total long-term debt $312,665
 $312,440
 $397,206
Less: current portion —
 —
 84,989
Total due beyond one year $312,665
 $312,440

$312,217

($000)November 2, 2019February 2, 2019November 3, 2018
6.38% Series A Senior Notes due 2018$—  $—  $84,997  
6.53% Series B Senior Notes due 202164,958  64,942  64,937  
3.375% Senior Notes due 2024247,820  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  

As of August 3,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 August 3, 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 August 3,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.

On December 13, 2018, the Company repaid at maturity the $85 million principal amount of the Series A 6.38% unsecured Senior Notes.

As of August 3,November 2, 2019, February 2, 2019, and August 4,November 3, 2018, total unamortized discount and debt issuance costs were $2.3$2.2 million, $2.6 million, and $2.8$2.7 million, respectively, and were classified as a reduction of Long-term debt.

The 2024 Notes, and the Series B Senior Notes are subject to prepayment penalties for early payment of principal.

The aggregate fair value of the two outstanding series of Senior Notes was approximately $332$333 million and $316 million, as of August 3,November 2, 2019 and February 2, 2019, respectively, compared to $403$402 million for the then three outstanding series of Senior Notes as of August 4, 2018.November 3, 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 sixnine month periods ended August 3,November 2, 2019 and August 4,November 3, 2018:

 Three Months Ended Six Months Ended
($000)August 3, 2019
 August 4, 2018
 August 3, 2019
 August 4, 2018
Interest expense on long-term debt$3,283
 $4,646
 $6,566
 $9,291
Other interest expense227
 233
 540
 535
Capitalized interest(1,118) (634) (1,883) (1,132)
Interest income(7,174) (5,638) (15,640) (10,590)
Interest income, net$(4,782) $(1,393) $(10,417) $(1,896)

Three Months EndedNine Months Ended
($000)November 2, 2019November 3, 2018November 2, 2019November 3, 2018
Interest expense on long-term debt$3,284  $4,646  $9,850  $13,937  
Other interest expense216  233  756  768  
Capitalized interest(1,186) (700) (3,069) (1,832) 
Interest income(6,716) (7,132) (22,356) (17,722) 
Interest income, net$(4,402) $(2,953) $(14,819) $(4,849) 

17

Revolving credit facility. In July 2019, the Company entered into a new $800$800 million unsecured revolving credit facility, which replaced the Company’s previous $600 million unsecured revolving credit facility. This new credit facility expires in July 2024, and contains a $300 million sublimit for issuance of standby letters of credit. The facility also contains an option allowing the Company to increase the size of its credit facility by up to an additional $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 75 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 August 3,November 2, 2019, the Company had 0 borrowings or standby letters of credit outstanding under this facility and the $800 million credit facility remains in place and available.
The revolving credit facility is subject to a financial leverage ratio covenant. As of August 3,November 2, 2019, the Company was in compliance with this covenant.

Note G: Taxes on Earnings

As of August 3,November 2, 2019, February 2, 2019, and August 4,November 3, 2018, the reserves for unrecognized tax benefits were $88.4$83.4 million, $78.8 million, and $130.8$130.5 million, inclusive of $14.9$13.9 million, $13.0 million, and $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, $70.5$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.

It is reasonably possible that certainCertain state tax matters may be concluded or statutesreturns are under audit by various tax authorities. Subsequent to the three month period ended November 2, 2019, the Company resolved uncertain tax positions with a state tax authority. As a result, the Company expects to recognize a tax benefit of limitations may lapse duringan approximate $10.0 million in the next 12 months. Accordingly, the total amountConsolidated Statement of Earnings, and a decrease in unrecognized tax benefits may decrease by up to $8.6 million.of approximately $16.2 million, inclusive of $6.6 million of interest and penalties, in the three month period ending February 1, 2020.

The Company is open to audit by the Internal Revenue Service under the statute of limitations for fiscal years 20152016 through 2018. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years 2014 through 2018. CertainIt is reasonably possible that certain state tax returns are currently under auditmatters 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 various tax authorities. The Company does not expect the results of these auditsup to have a material impact on the consolidated financial statements.$4.9 million.



18

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 3,November 2, 2019 and August 4,November 3, 2018, the related condensed consolidated statements of earnings, comprehensive income, and stockholders' equity, for the three and sixnine month periods ended August 3,November 2, 2019 and August 4,November 3, 2018, and of cash flows for the sixnine month periods ended August 3,November 2, 2019 and August 4,November 3, 2018, 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 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 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 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 2, 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
SeptemberDecember 11, 2019

19

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 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 2018.2018. 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 1,5231,550 locations in 39 states, the District of Columbia and Guam as of August 3,November 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 249260 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 sixnine month periods ended August 3,November 2, 2019 and August 4,November 3, 2018:

Three Months EndedNine Months Ended
November 2, 2019November 3, 2018November 2, 2019November 3, 2018
Sales
Sales (millions)$3,849  $3,550  $11,626  $10,876  
Sales growth8.4 %6.6 %6.9 %8.0 %
Comparable store sales growth5 %3 %3 %3 %
Costs and expenses (as a percent of sales)
Cost of goods sold71.9 %71.8 %71.5 %71.1 %
Selling, general and administrative15.7 %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 %



20
 Three Months Ended Six Months Ended
 August 3, 2019
 August 4, 2018
 August 3, 2019
 August 4, 2018
Sales       
Sales (millions)$3,980
 $3,738
 $7,777
 $7,327
Sales growth6.5% 8.9% 6.1% 8.7%
Comparable store sales growth3% 5% 2% 4%
        
Costs and expenses (as a percent of sales)       
Cost of goods sold71.4% 71.3% 71.3% 70.8%
Selling, general and administrative14.9% 14.8% 14.8% 14.7%
Interest income, net(0.1%) (0.0%) (0.1%) (0.0%)
        
Earnings before taxes (as a percent of sales)13.8% 13.9% 14.0% 14.5%

       
Net earnings (as a percent of sales)10.4% 10.4% 10.7% 11.0%





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 EndedNine Months Ended
Store CountNovember 2, 2019November 3, 2018November 2, 2019November 3, 2018
Beginning of the period1,772  1,680  1,717  1,622  
Opened in the period42  40  98  99  
Closed in the period(4) 
1
—  (5) 
1
(1) 
End of the period1,810  1,720  1,810  1,720  
 Three Months Ended Six Months Ended
Store CountAugust 3, 2019
 August 4, 2018
 August 3, 2019
 August 4, 2018
Beginning of the period1,745
 1,651
 1,717
 1,622
Opened in the period28
 30
 56
 59
Closed in the period(1) (1) (1) (1)
End of the period1,772
 1,680
 1,772
 1,680

1 Includes a temporary closure of a store impacted by a weather event.

Sales. Sales for the three month period ended August 3,November 2, 2019, increased $242$299 million, or 6.5%8.4%, compared to the three month period ended August 4,November 3, 2018, due to the opening of 9290 net new stores between August 4,November 3, 2018 and August 3,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 sixnine month period ended August 3,November 2, 2019, increased $450$750 million, or 6.1%6.9%, compared to the sixnine month period ended August 4,November 3, 2018, due to the opening of 9290 net new stores between August 4,November 3, 2018 and August 3,November 2, 2019, and a 2%3% increase in “comparable” store sales.

Our sales mix for the three and sixnine month periods ended AugustNovember 2, 2019 and November 3, 2019 and August 4, 2018 is shown below:


 Three Months Ended Six Months Ended
 August 3, 2019
 August 4, 2018
 August 3, 2019
 August 4, 2018
Ladies27% 28% 27% 28%
Home Accents and Bed and Bath23% 24% 24% 24%
Shoes14% 14% 14% 14%
Men's15% 14% 14% 13%
Accessories, Lingerie, Fine Jewelry, and Fragrances13% 12% 13% 13%
Children's8% 8% 8% 8%
Total100% 100% 100% 100%

Three Months EndedNine Months Ended
November 2, 2019November 3, 2018November 2, 2019November 3, 2018
Ladies26 %27 %27 %28 %
Home Accents and Bed and Bath24 %25 %24 %24 %
Shoes14 %13 %14 %14 %
Men's14 %14 %14 %13 %
Accessories, Lingerie, Fine Jewelry, and Fragrances13 %13 %13 %13 %
Children's9 %8 %8 %8 %
Total100 %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 sixnine month periods ended August 3,November 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 sixnine month periods ended August 3,November 2, 2019, increased $177$219 million and $356$575 million compared to the same periods in the prior year, mainly due to increased sales from the opening of 9290 net new stores and a 3%5% and 2%3% increase in comparable store sales, respectively.

Cost of goods sold as a percentage of sales for the three month period ended August 3,November 2, 2019, increased approximately 10 basis points from the same period in the prior year, primarily due to a 2045 basis point increase in freight costs and a 10 basis point increase in occupancy costs. These increases weredistribution expenses, partially offset by a 1020 basis point improvement in merchandise margin, and a 10 basis point decrease in distributionoccupancy costs, and a five basis point decrease in buying costs.

Cost of goods sold as a percentage of sales for the sixnine month period ended August 3,November 2, 2019, increased approximately 5035 basis points from the same period in the prior year, primarily due to a 2530 basis point increase in distribution expenses, a 30
21

20 basis point increase in freight costs, a 10 basis point increase in occupancy costs, and a five basis point increase in buyingoccupancy costs. These increases were partially offset by a 20 basis point improvement in merchandise margin.



We cannot be sure that the gross profit margins realized for the three and sixnine month periods ended August 3,November 2, 2019, will continue in the future.

Selling, general and administrative expenses. For the three and sixnine month periods ended August 3,November 2, 2019, selling, general and administrative expenses ("SG&A") increased $37$43 million and $71$114 million compared to the same periods in the prior year, mainly due to increased store operating costs reflecting the opening of 9290 net new stores between August 4,November 3, 2018 and August 3,November 2, 2019.

Selling, general and administrative expenses as a percentage of sales for the three and six month periodsperiod ended August 3,November 2, 2019, increaseddecreased approximately five10 basis points from the same periodsperiod in the prior year primarily due to leverage on higher wages.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, net. Interest income, net for the three and sixnine month periods ended August 3,November 2, 2019, increased compared to the same periods in the prior yearyear. The increase for the three month period ended November 2, 2019 was primarily due to lower interest expense 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, net for the three and sixnine month periods ended August 3,November 2, 2019 and August 4,November 3, 2018, consists of the following:

Three Months EndedNine Months Ended
($000)November 2, 2019November 3, 2018November 2, 2019November 3, 2018
Interest expense on long-term debt$3,284  $4,646  $9,850  $13,937  
Other interest expense216  233  756  768  
Capitalized interest(1,186) (700) (3,069) (1,832) 
Interest income(6,716) (7,132) (22,356) (17,722) 
Interest income, net$(4,402) $(2,953) $(14,819) $(4,849) 
 Three Months Ended Six Months Ended
($000)August 3, 2019
 August 4, 2018
 August 3, 2019
 August 4, 2018
Interest expense on long-term debt$3,283
 $4,646
 $6,566
 $9,291
Other interest expense227
 233
 540
 535
Capitalized interest(1,118) (634) (1,883) (1,132)
Interest income(7,174) (5,638) (15,640) (10,590)
Interest income, net$(4,782) $(1,393) $(10,417) $(1,896)

Taxes on earnings. Our effective tax rate for the three and nine month periods ended August 3,November 2, 2019, and August 4, 2018, was approximately 25%23%. Our effective tax rate for the sixthree and nine month periods ended AugustNovember 3, 2019 and August 4, 2018, was 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 were primarily due to the resolution of tax 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 tax authorities. Subsequent to the three month period ended November 2, 2019, we resolved uncertain tax positions with a state tax authority. As a result, we expect to recognize a tax benefit of approximately $10.0 million in the Consolidated Statement of Earnings, and a decrease in unrecognized tax benefits of approximately $16.2 million, inclusive of $6.6 million of interest and penalties, in the three month period ending February 1, 2020. We anticipate that our effective tax rate for fiscal 2019 will be betweenapproximately 23% and 24%.

Net earnings. Net earnings as a percentage of sales for the three month period ended August 3,November 2, 2019, was unchanged fromhigher compared to the same period in the prior year.year primarily due to lower taxes on earnings. Net earnings as a percentage of sales for the sixnine month period ended August 3,November 2, 2019, was lower compared to the same period in the prior year primarily due to higher cost of goods sold, and higher SG&A expenses, partially offset by lower taxes on earnings and higher net interest income.income as a percentage of sales.

Earnings per share. Diluted earnings per share for the three and sixnine month periods ended August 3,November 2, 2019 were $1.14$1.03 and $2.29,$3.32, respectively, compared to $1.04$0.91 and $2.15,$3.06, respectively, for the three and sixnine month periods ended August 4,November 3, 2018. The 10%13% and 6%8% increases in diluted earnings per share for the three and sixnine month periods ended August 3,November 2, 2019, were attributable to 6%10% and 3%5% increases in net earnings, and 4% and 3% increases from the reduction in
22

weighted average diluted shares outstanding, largely due to stock repurchases under our stock repurchase program for both the three and sixnine 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, 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, 2019November 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  
 Six Months Ended
($000)August 3, 2019
 August 4, 2018
Cash provided by operating activities$1,083,463
 $1,014,184
Cash used in investing activities(249,797) (178,130)
Cash used in financing activities(868,344) (739,795)
Net (decrease) increase in cash, cash equivalents, and restricted cash and cash equivalents$(34,678) $96,259

Operating Activities

Net cash provided by operating activities was $1,083.5$1,410.9 million and $1,014.2$1,450.1 million for the sixnine month periods ended AugustNovember 2, 2019 and November 3, 2019 and August 4, 2018,, 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 sixnine month period ended August 3,November 2, 2019,, compared to the same period in the prior year was primarily driven by the timing of merchandise receipts and related payments associated with higher inventory versus last year, andpartially offset by higher net earnings. The timing of merchandise receipts and related payments versus last year resulted in higher accounts payable leverage (defined as accounts payable divided by merchandise inventory) which was 74%of 68%, 67%, and 70% as of August 3,November 2, 2019, February 2, 2019, and August 4,November 3, 2018, respectively.

As a regular part of our business, packaway inventory levels will vary over time based on availability of compelling opportunities in the marketplace. Packaway merchandise is purchased with the intent that it will be stored in our warehouses until a later date. The timing of the release of packaway inventory to our stores is principally driven by the product mix and seasonality of the merchandise, and its relation to our store merchandise assortment plans. As such, the aging of packaway varies by merchandise category and seasonality of 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 3,November 2, 2019,, packaway inventory was 43%39% of total inventory compared to 46% at the end of fiscal 2018.2018. As of August 4,November 3, 2018, packaway inventory was 44%41% of total inventory compared to 49% at the end of fiscal 2017.

Investing Activities

Net cash used in investing activities was $249.8$400.7 million and $178.1$292.6 million for the sixnine month periods ended AugustNovember 2, 2019 and November 3, 2019 and August 4, 2018,, respectively. The increase in cash used for investing activities for the sixnine month period ended August 3,November 2, 2019 compared to the sixnine month period ended August 4,November 3, 2018 was due to an increase in our capital expenditures.


23

Our capital expenditures were $250.3$401.3 million and $178.6$293.4 million for the sixnine month periods ended AugustNovember 2, 2019 and November 3, 2019 and August 4, 2018,, respectively. Our capital expenditures include costs to build, expand, and improve distribution centers; open new stores and improve existing stores; and for various other expenditures related to our information technology systems, buying and corporate offices.



We are forecasting approximately $600$580 million in capital expenditures for fiscal year 2019 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 flow from operations.

Financing Activities

Net cash used in financing activities was $868.3$1,284.7 million and $739.8$1,099.1 million for the sixnine month periods ended August 3,November 2, 2019 and August 4,November 3, 2018, respectively. For the sixnine month periods ended August 3,November 2, 2019 and August 4,November 3, 2018, 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 sixnine month period ended August 3,November 2, 2019, compared to the sixnine month period ended August 4,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 6.69.6 million and 6.59.4 million shares of common stock for aggregate purchase prices of approximately $640.3 million$965.9 millions and $528.6$806.5 million during the sixnine month periods ended AugustNovember 2, 2019 and November 3, 2019 and August 4, 2018,, respectively. We also acquired 0.6 million and 0.7 million shares of treasury stock under our employee stock equity compensation programs, for aggregate purchase prices of approximately $52.3$56.9 million and $51.1$53.7 million during the sixnine month periods ended AugustNovember 2, 2019 and November 3, 2019 and August 4, 2018,, respectively. In March 2019, our Board of Directors approved a new, two-year $2.55 billion stock repurchase program through fiscal 2020.


For the sixnine month periods ended August 3,November 2, 2019 and August 4,November 3, 2018, we paid cash dividends of $186.6$278.4 million and $170.0$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 2019.2019.

In July 2019, we entered into a new $800 million unsecured revolving credit facility, which replaced our previous $600 million unsecured revolving credit facility. This new credit facility expires in July 2024, and contains a $300 million sublimit for issuance of standby letters of credit. The facility also contains an option allowing us to increase the size of our credit facility by up to an additional $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 75 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 August 3,November 2, 2019, we had no borrowings or standby letters of credit outstanding under this facility and the $800 million credit facility remains in place and available.

The revolving credit facility is subject to a financial leverage ratio covenant. As of August 3,November 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 12 months.


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Contractual Obligations and Off-Balance Sheet Arrangements

The table below presents our significant contractual obligations as of August 3,November 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 leases587,660
 1,108,619
 763,472
 680,594
 3,140,345
   New York buying office ground lease2
5,883
 12,891
 14,178
 951,072
 984,024
Unrecorded contractual obligations:         
   Real estate obligations3
11,038
 40,734
 39,774
 120,330
 211,876
   Interest payment obligations12,682
 23,242
 16,875
 4,219
 57,018
   Purchase obligations4
2,820,404
 19,923
 6,012
 40
 2,846,379
Total contractual obligations$3,437,667
 $1,270,409
 $840,311
 $2,006,255
 $7,554,642

($000)Less than
one year		1 - 3
years		3 - 5
years		After 5
years		Total¹
Recorded contractual obligations:
   Senior notes$—  $65,000  $250,000  $—  $315,000  
   Operating leases598,139  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 obligations12,682  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  

1 We have a $87.4$82.3 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.estimated, except for the subsequent event item discussed in Note G.

² Our 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 August 3,November 2, 2019.

Senior notes. As of August 3,November 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 August 3,November 2, 2019,, we 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 August 3,November 2, 2019,, we were in compliance with these covenants.

The 2024 Notes, and Series B senior notes are subject to prepayment penalties for early payment of principal.

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 3,November 2, 2019,, February 2, 2019, and August 4,November 3, 2018,, we had $5.5$4.6 million, $7.3 million, and $7.8$7.3 million, respectively, in standby letters of credit outstanding and $55.9$56.2 million, $58.3 million and $57.6$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 $28.2$23.5 million, $13.3 million, and $24.9$25.4 million in trade letters of credit outstanding at August 3,November 2, 2019,, February 2, 2019, and August 4,November 3, 2018,, respectively.

Dividends. In AugustNovember 2019, our Board of Directors declared a cash dividend of $0.255 per common share, payable on September 30,December 31, 2019.


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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. Other than changes to our lease accounting policies as a result of adoption of Accounting Standards Update ("ASU") No. 2016-02, Leases (Accounting Standards 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 2, 2019.2019.

As our leases generally do not provide an implicit discount rate, we use the estimated collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease 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 terms of 12 months or less, and account 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.

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 theour adoption of ASC 842.


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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 trade 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.




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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 2, 2019.
August 3, 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 August 3,November 2, 2019,, we had no borrowings outstanding under our revolving credit facility.

As of August 3,November 2, 2019, we have outstanding unsecured 6.53% Series B Senior Notes due December 2021 with an aggregate principal amount of $65 million, and 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 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 sixnine month periods ended August 3, 2019.November 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 secondthird fiscal quarter of 2019 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 2019second third fiscal quarter.

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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 2, 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 secondthird quarter of fiscal 2019 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  $104.25794,524  $1,826,948
September
(9/01/2019 - 10/05/2019)1,254,035  $108.171,224,791  $1,694,481
October
(10/06/2019 - 11/02/2019)996,215  $110.81996,215  $1,584,091
Total3,057,830  $107.993,015,530  $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   
May       
(5/05/2019 - 6/01/2019)816,299
 $94.75 815,508
 $2,152,597
June       
(6/02/2019 - 7/06/2019)1,340,481
 $99.75 1,328,086
 $2,020,130
July       
(7/07/2019 - 8/03/2019)1,049,472
 $105.33 1,048,031
 $1,909,740
Total3,206,252
 $100.30 3,191,625
 $1,909,740

1 We acquired 14,62742,300 shares of treasury stock during the quarter ended August 3, 2019.November 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.

2 In March 2019, our Board of Directors approved a two-year $2.55 billion stock repurchase program through fiscal 2020.

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ITEM 6. EXHIBITS
Exhibit
NumberExhibit
3.1
Certificate of Incorporation of Ross Stores, Inc. as amended (Corrected First Restated Certificate of Incorporation, dated March 17, 1999, together with amendments thereto through Amendment of Certificate of Incorporation dated May 29, 2015) incorporated by reference to Exhibit 3.1 to the Form 10-Q filed by Ross Stores, Inc. for its quarter ended August 1, 2015.
3.2
Amended and Restated Bylaws of Ross Stores, Inc. (as amended March 8, 2017), incorporated by reference to Exhibit 3.2 to the Form 10-K filed by Ross Stores, Inc. for its fiscal year ended January 28, 2017.
10.1
Seventh Amendment to the Employment Agreement effective July 13,August 16, 2019 between Michael BalmuthHartshorn and Ross Stores, Inc.
10.2
Amendment to Independent Contractor ConsultancyEmployment Agreement effective July 30, August 16,2019 between Norman A. Ferberbetween Travis Marquette and Ross Stores, Inc.Inc.
10.315 
Revolving Credit Agreement dated July 1, 2019 among Ross Stores, Inc. and various lenders.
15
Letter re: Unaudited Interim Financial Information from Deloitte & Touche LLP dated SeptemberDecember 11, 2019.
31.1
Certification of Chief Executive Officer Pursuant to Sarbanes-Oxley Act Section 302(a).
31.2
Certification of Chief Financial Officer Pursuant to Sarbanes-Oxley Act Section 302(a).
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
101.INSXBRL Instance Document. (The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.)
101.SCHInline XBRL Taxonomy Extension Schema
101.CALInline XBRL Taxonomy Extension Calculation Linkbase
101.DEFInline XBRL Taxonomy Extension Definition Linkbase
101.LABInline XBRL Taxonomy Extension Label Linkbase
101.PREInline XBRL Taxonomy Extension Presentation Linkbase
104Cover 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.)


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

ROSS STORES, INC.
(Registrant)
ROSS STORES, INC.
Date:(Registrant)
Date:SeptemberDecember 11, 2019By: /s/Travis R. Marquette
Travis R. Marquette
Group Senior Vice President and Chief Financial Officer, and Principal Accounting Officer

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