QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 29, 2023
☐
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)
Delaware
94-1390387
(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)
965-4400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common stock,
par value $.01
ROST
NASDAQ 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.
Yesý 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).
Yesý 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 filerý 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 ☒
The number of shares of Common Stock, with $.01 par value, outstanding on August 11, 2023 was 338,632,172.
($000, except stores and per share data, unaudited)
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Sales
$
4,934,905
$
4,583,009
$
9,429,591
$
8,916,109
Costs and Expenses
Cost of goods sold
3,569,367
3,399,535
6,861,973
6,595,981
Selling, general and administrative
807,898
667,063
1,554,120
1,336,559
Interest (income) expense, net
(37,214)
10,667
(68,611)
28,363
Total costs and expenses
4,340,051
4,077,265
8,347,482
7,960,903
Earnings before taxes
594,854
505,744
1,082,109
955,206
Provision for taxes on earnings
148,535
121,227
264,599
232,244
Net earnings
$
446,319
$
384,517
$
817,510
$
722,962
Earnings per share
Basic
$
1.33
$
1.11
$
2.42
$
2.09
Diluted
$
1.32
$
1.11
$
2.41
$
2.08
Weighted-average shares outstanding (000)
Basic
336,231
344,884
337,140
345,969
Diluted
337,932
346,106
339,003
347,470
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 Ended
($000, unaudited)
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Net earnings
$
446,319
$
384,517
$
817,510
$
722,962
Other comprehensive income
—
—
—
—
Comprehensive income
$
446,319
$
384,517
$
817,510
$
722,962
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Condensed Consolidated Balance Sheets
($000, except share data, unaudited)
July 29, 2023
January 28, 2023
July 30, 2022
Assets
Current Assets
Cash and cash equivalents
$
4,583,606
$
4,551,876
$
3,903,670
Accounts receivable
175,410
145,694
167,503
Merchandise inventory
2,300,063
2,023,495
2,716,878
Prepaid expenses and other
214,673
183,654
197,020
Total current assets
7,273,752
6,904,719
6,985,071
Property and Equipment
Land and buildings
1,490,681
1,495,006
1,486,450
Fixtures and equipment
4,027,874
3,961,733
3,759,071
Leasehold improvements
1,463,585
1,433,647
1,366,999
Construction-in-progress
518,405
319,319
158,446
7,500,545
7,209,705
6,770,966
Less accumulated depreciation and amortization
4,189,940
4,028,178
3,841,192
Property and equipment, net
3,310,605
3,181,527
2,929,774
Operating lease assets
3,164,685
3,098,134
3,025,814
Other long-term assets
238,260
232,083
239,263
Total assets
$
13,987,302
$
13,416,463
$
13,179,922
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable
$
2,150,999
$
2,009,924
$
2,085,680
Accrued expenses and other
689,866
638,561
611,186
Current operating lease liabilities
668,028
655,976
647,504
Accrued payroll and benefits
435,300
279,710
300,611
Income taxes payable
25,449
52,075
—
Total current liabilities
3,969,642
3,636,246
3,644,981
Long-term debt
2,458,615
2,456,510
2,454,413
Non-current operating lease liabilities
2,653,632
2,593,961
2,525,512
Other long-term liabilities
231,945
224,104
231,285
Deferred income taxes
218,726
217,059
196,780
Commitments and contingencies
Stockholders’ Equity
Common stock, par value $.01 per share
Authorized 1,000,000,000 shares
Issued and outstanding 338,982,000, 342,753,000
and 347,552,000 shares, respectively
3,390
3,428
3,475
Additional paid-in capital
1,885,406
1,820,249
1,769,424
Treasury stock
(623,185)
(584,750)
(574,529)
Retained earnings
3,189,131
3,049,656
2,928,581
Total stockholders’ equity
4,454,742
4,288,583
4,126,951
Total liabilities and stockholders’ equity
$
13,987,302
$
13,416,463
$
13,179,922
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Condensed Consolidated Statements of Stockholders’ Equity
Six Months Ended July 29, 2023
Common stock
Additional paid-in capital
Treasury stock
Retained earnings
(000)
Shares
Amount
Total
Balance at January 28, 2023
342,753
$
3,428
$
1,820,249
$
(584,750)
$
3,049,656
$
4,288,583
Net earnings
—
—
—
—
371,191
371,191
Common stock issued under stock plans, net of shares
used for tax withholding
461
4
6,145
(37,522)
—
(31,373)
Stock-based compensation
—
—
33,063
—
—
33,063
Common stock repurchased, inclusive of excise tax
(2,169)
(22)
(9,729)
—
(226,523)
(236,274)
Dividends declared ($0.335 per share)
—
—
—
—
(114,794)
(114,794)
Balance at April 29, 2023
341,045
$
3,410
$
1,849,728
$
(622,272)
$
3,079,530
$
4,310,396
Net earnings
—
—
—
—
446,319
446,319
Common stock issued under stock plans, net of shares
used for tax withholding
89
1
6,208
(913)
—
5,296
Stock-based compensation
—
—
39,429
—
—
39,429
Common stock repurchased, inclusive of excise tax
(2,152)
(21)
(9,959)
—
(222,713)
(232,693)
Dividends declared ($0.335 per share)
—
—
—
—
(114,005)
(114,005)
Balance at July 29, 2023
338,982
$
3,390
$
1,885,406
$
(623,185)
$
3,189,131
$
4,454,742
The accompanying notes are an integral part of these condensed consolidated financial statements.
Six Months Ended July 30, 2022
Common stock
Additional paid-in capital
Treasury stock
Retained earnings
(000)
Shares
Amount
Total
Balance at January 29, 2022
351,720
$
3,517
$
1,717,530
$
(535,895)
$
2,874,898
$
4,060,050
Net earnings
—
—
—
—
338,445
338,445
Common stock issued under stock plans, net of shares
used for tax withholding
1,131
11
5,906
(38,113)
—
(32,196)
Stock-based compensation
—
—
36,071
—
—
36,071
Common stock repurchased
(2,524)
(25)
(10,266)
—
(229,274)
(239,565)
Dividends declared ($0.310 per share)
—
—
—
—
(108,908)
(108,908)
Balance at April 30, 2022
350,327
$
3,503
$
1,749,241
$
(574,008)
$
2,875,161
$
4,053,897
Net earnings
—
—
—
—
384,517
384,517
Common stock issued under stock plans, net of shares
used for tax withholding
153
1
5,974
(521)
—
5,454
Stock-based compensation
—
—
26,803
—
—
26,803
Common stock repurchased
(2,928)
(29)
(12,594)
—
(222,812)
(235,435)
Dividends declared ($0.310 per share)
—
—
—
—
(108,285)
(108,285)
Balance at July 30, 2022
347,552
$
3,475
$
1,769,424
$
(574,529)
$
2,928,581
$
4,126,951
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Condensed Consolidated Statements of Cash Flows
Six Months Ended
($000, unaudited)
July 29, 2023
July 30, 2022
Cash Flows From Operating Activities
Net earnings
$
817,510
$
722,962
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization
197,924
189,181
Stock-based compensation
72,492
62,874
Deferred income taxes
1,667
59,138
Change in assets and liabilities:
Merchandise inventory
(276,568)
(454,605)
Other current assets
(60,431)
(71,290)
Accounts payable
144,775
(288,454)
Other current liabilities
235,490
(265,399)
Income taxes
(24,152)
(13,941)
Operating lease assets and liabilities, net
5,172
4,660
Other long-term, net
2,402
(1,391)
Net cash provided by (used in) operating activities
1,116,281
(56,265)
Cash Flows From Investing Activities
Additions to property and equipment
(363,459)
(243,346)
Net cash used in investing activities
(363,459)
(243,346)
Cash Flows From Financing Activities
Issuance of common stock related to stock plans
12,358
11,892
Treasury stock purchased
(38,435)
(38,634)
Repurchase of common stock
(464,890)
(475,000)
Dividends paid
(228,799)
(217,193)
Net cash used in financing activities
(719,766)
(718,935)
Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents
33,056
(1,018,546)
Cash, cash equivalents, and restricted cash and cash equivalents:
Beginning of period
4,612,241
4,982,382
End of period
$
4,645,297
$
3,963,836
Supplemental Cash Flow Disclosures
Interest paid
$
40,158
$
40,158
Income taxes paid
$
287,084
$
187,047
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
Notes to Condensed Consolidated Financial Statements
Three and Six Months Ended July 29, 2023 and July 30, 2022
(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 July 29, 2023 and July 30, 2022, and the results of operations, comprehensive income, and stockholders’ equity for the three and six month periods ended July 29, 2023 and July 30, 2022, and the cash flows for the six month periods ended July 29, 2023 and July 30, 2022. The Condensed Consolidated Balance Sheet as of January 28, 2023, 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 (“GAAP”) have been condensed or omitted for purposes of these interim condensed consolidated financial statements. The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including notes thereto, contained in the Company’s Annual Report on Form 10-K for the year ended January 28, 2023.
The results of operations, comprehensive income, and stockholders’ equity for the three and six month periods ended July 29, 2023 and July 30, 2022, and the cash flows for the six month periods ended July 29, 2023 and July 30, 2022presented herein are not necessarily indicative of the results to be expected for the full fiscal year. The fiscal year ending February 3, 2024 is referred to as fiscal 2023 and is a 53-week year. The fiscal year ended January 28, 2023 is referred to as fiscal 2022 and was a 52-week year.
Recently adopted accounting standards. In September 2022, the FASB issued Accounting Standards Update (ASU) 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, to enhance transparency about an entity’s use of supplier finance programs. The ASU requires enhanced and additional disclosures about the key terms of supplier finance programs including a description of where in the financial statements any related amounts are presented. The Company adopted ASU 2022-04 in the first quarter of fiscal 2023 on a retrospective basis, excluding the rollforward requirements which will be adopted in fiscal 2024 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements for the three and six month periods ended July 29, 2023 and is not expected to have a material impact on the Company’s fiscal 2023 financial statements.
Use of accounting estimates. The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. The Company’s significant accounting estimates include valuation reserves for inventory, packaway and other inventory carrying costs, useful lives of fixed assets, insurance reserves, reserves for uncertain tax positions, and legal claims. The uncertainties and potential impacts from macroeconomic factors, such as inflation, increase the challenge of making these estimates; actual results could differ materially from the Company’s estimates.
Revenue recognition. The following sales mix table disaggregates revenue by merchandise category for the three and six month periods ended July 29, 2023 and July 30, 2022:
8
Three Months Ended
Six Months Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Home Accents and Bed and Bath
24
%
24
%
25
%
25
%
Ladies
24
%
25
%
24
%
25
%
Men’s
16
%
16
%
15
%
15
%
Accessories, Lingerie, Fine Jewelry, and Cosmetics
15
%
14
%
15
%
14
%
Shoes
13
%
13
%
13
%
13
%
Children’s
8
%
8
%
8
%
8
%
Total
100
%
100
%
100
%
100
%
Cash and cash equivalents. Cash equivalents consist of highly liquid, fixed income instruments purchased with an original maturity of three months or less. The institutions where these instruments are held could potentially subject the Company to concentrations of credit risk. The Company manages its risk associated with these instruments primarily by holding its cash and cash equivalents across a highly diversified set of banks and other financial institutions.
Restricted cash and cash equivalents. Restricted cash and cash equivalents serve as collateral for certain insurance obligations. These restricted funds are invested in bank deposits, money market funds, and U.S. Government and agency 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 obligations.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash and cash equivalents in the Condensed Consolidated Balance Sheets that reconcile to the amounts shown on the Condensed Consolidated Statements of Cash Flows:
($000)
July 29, 2023
January 28, 2023
July 30, 2022
Cash and cash equivalents
$
4,583,606
$
4,551,876
$
3,903,670
Restricted cash and cash equivalents included in:
Prepaid expenses and other
12,955
12,677
11,432
Other long-term assets
48,736
47,688
48,734
Total restricted cash and cash equivalents
61,691
60,365
60,166
Total cash, cash equivalents, and restricted cash and cash equivalents
$
4,645,297
$
4,612,241
$
3,963,836
Property and equipment. As of July 29, 2023 and July 30, 2022, the Company had $34.6 million and $24.4 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.
Operating leases.Supplemental cash flow disclosures related to operating lease assets obtained in exchange for operating lease liabilities (includes new leases and remeasurements or modifications of existing leases) were as follows:
Three Months Ended
Six Months Ended
($000)
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Operating lease assets obtained in exchange for operating lease liabilities
$
207,218
$
126,236
$
390,851
$
314,081
Cash dividends. On August 16, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.335 per common share, payable on September 29, 2023. The Company’s Board of Directors declared a cash dividend of $0.335 per common share in February and May 2023, and $0.310 per common share in March, May, August, and November 2022.
Stock repurchase program. In March 2022, the Company’s Board of Directors approved a two-year program to repurchase up to $1.9 billion of the Company’s common stock through fiscal 2023. During the six month period ended July 29, 2023, the Company repurchased 4.3 million shares of common stock for $464.9 million, excluding excise tax due
9
under the Inflation Reduction Act of 2022. The Company repurchased 5.5 million shares of common stock for $475.0 million during the six month period ended July 30, 2022.
Litigation, claims, and assessments. Like many retailers, the Company has been named in class/representative action lawsuits, primarily in California, alleging violations by the Company of wage and hour laws. Class/representative action litigation remains pending as of July 29, 2023.
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 currently pending class/representative 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.
Supply chain finance program. The Company facilitates a voluntary supply chain finance program (the “program”) to provide certain suppliers with the opportunity to sell receivables due from the Company to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. A third-party bank administers the program. The Company’s responsibility is limited to making payment on the terms originally negotiated with each supplier, regardless of whether a supplier sells its receivable to a financial institution. The Company is not a party to the agreements between the participating financial institutions and the suppliers in connection with the program and receives no financial incentives from the suppliers or the financial institutions. No guarantees are provided by the Company under the program and the Company’s rights and obligations to its suppliers are not affected by the program. The range of payment terms negotiated with a supplier is consistent, irrespective of whether a supplier participates in the program.
All outstanding payments owed under the program are recorded within Accounts payable in the Consolidated Balance Sheets. The Company accounts for all payments made under the program as a reduction to operating cash flows in Accounts payable within the Consolidated Statements of Cash Flows. The amounts owed to a participating financial institution under the program and included in Accounts payable were $165.6 million, $119.2 million, and $167.6 million at July 29, 2023, January 28, 2023, and July 30, 2022, respectively.
Note B: Fair Value Measurements
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, maximize the use of observable inputs, and minimize the use of unobservable inputs when measuring fair value. Corporate, U.S. government and agency, and mortgage-backed securities are classified within Level 1 or Level 2 because these securities are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.
The fair value of the Company’s financial instruments are as follows:
($000)
July 29, 2023
January 28, 2023
July 30, 2022
Cash and cash equivalents (Level 1)
$
4,583,606
$
4,551,876
$
3,903,670
Restricted cash and cash equivalents (Level 1)
$
61,691
$
60,365
$
60,166
10
The underlying assets in the Company’s nonqualified deferred compensation program as of July 29, 2023, January 28, 2023, and July 30, 2022 (included in Other long-term assets and in Other long-term liabilities) primarily consist of participant-directed money market, stock, and bond funds. The fair value measurement for funds with quoted market prices in active markets (Level 1) are as follows:
($000)
July 29, 2023
January 28, 2023
July 30, 2022
Level 1
$
161,091
$
155,496
$
158,223
Note C: Stock-Based Compensation
For the three and six month periods ended July 29, 2023 and July 30, 2022, the Company recognized stock-based compensation expense as follows:
Three Months Ended
Six Months Ended
($000)
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Restricted stock
$
24,055
$
20,947
$
45,548
$
41,160
Performance awards
14,278
4,801
24,762
19,614
Employee stock purchase plan
1,096
1,055
2,182
2,100
Total
$
39,429
$
26,803
$
72,492
$
62,874
Total stock-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Earnings for the three and six month periods ended July 29, 2023 and July 30, 2022 is as follows:
Three Months Ended
Six Months Ended
Statements of Earnings Classification ($000)
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Cost of goods sold
$
21,306
$
15,675
$
38,631
$
34,221
Selling, general and administrative
18,123
11,128
33,861
28,653
Total
$
39,429
$
26,803
$
72,492
$
62,874
The tax benefits related to stock-based compensation expense for the three and six month periods ended July 29, 2023 were $8.2 million and $15.2 million, respectively. The tax benefits related to stock-based compensation expense for the three and six month periods ended July 30, 2022 were $5.3 million and $12.8 million, respectively.
Restricted stock awards. The Company grants shares of restricted stock or restricted stock units to directors, officers, and key employees. The market value of shares of restricted stock and restricted stock units at the date of grant is amortized to expense over the vesting period of generally three to five years.
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 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 three years from the date the performance award was granted.
11
As of July 29, 2023, shares related to unvested restricted stock, restricted stock units, and performance share awards totaled 4.2 million shares. A summary of restricted stock, restricted stock units, and performance share award activity for the six month period ended July 29, 2023, is presented below:
(000, except per share data)
Number of shares
Weighted-average grant date fair value
Unvested at January 28, 2023
3,943
$
99.69
Awarded
1,188
108.90
Released
(936)
94.48
Forfeited
(35)
101.61
Unvested at July 29, 2023
4,160
$
103.61
The unamortized compensation expense at July 29, 2023 was $217.6 million which is expected to be recognized over a weighted-average remaining period of 2.1 years. The unamortized compensation expense at July 30, 2022 was $239.1 million which was expected to be recognized over a weighted-average remaining period of 2.2 years.
During the three and six month periods ended July 29, 2023 and July 30, 2022, shares purchased by the Company for tax withholding totaled 8,842 and 376,128, and 6,751 and 415,216, respectively, and are considered treasury shares which are available for reissuance.
Employee stock purchase plan. Under the Employee Stock Purchase Plan (“ESPP”), eligible employees participating in the quarterly offering period can choose to have up to the lesser of 10% of their annual base earnings or the IRS annual share purchase limit of $25,000 in aggregate market value to purchase the Company’s common stock. The purchase price of the stock is 85% of the closing market price on the date of purchase. Purchases occur on a quarterly basis (on the last trading day of each calendar quarter). The Company recognizes expense for ESPP purchase rights equal to the value of the 15% discount given on the purchase date.
Note D: Earnings Per Share
The Company computes and reports both basic earnings per share (“EPS”) and diluted EPS. Basic EPS is computed by dividing net earnings by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net earnings by the sum of the weighted-average number of common shares and dilutive common stock equivalents outstanding during the period. Diluted EPS reflects the total potential dilution that could occur from outstanding equity plan awards and unvested shares of both performance and non-performance based awards of restricted stock and restricted stock units.
For the three and six month periods ended July 29, 2023, approximately 14,000 and 18,000 weighted-average shares were excluded from the calculation of diluted EPS, respectively, because their effect would have been anti-dilutive for the periods presented. For the three and six month periods ended July 30, 2022, approximately 1,509,000 and 747,000 weighted-average shares were excluded from the calculation of diluted EPS, respectively, because their effect would have been anti-dilutive for the periods presented.
12
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
July 29, 2023
Shares
336,231
1,701
337,932
337,140
1,863
339,003
Amount
$
1.33
$
(0.01)
$
1.32
$
2.42
$
(0.01)
$
2.41
July 30, 2022
Shares
344,884
1,222
346,106
345,969
1,501
347,470
Amount
$
1.11
$
—
$
1.11
$
2.09
$
(0.01)
$
2.08
Note E: Debt
Long-term debt.Unsecured senior debt (the “Senior Notes”), net of unamortized discounts and debt issuance costs, consisted of the following:
($000)
July 29, 2023
January 28, 2023
July 30, 2022
3.375% Senior Notes due 2024
$
249,484
$
249,257
$
249,032
4.600% Senior Notes due 2025
697,800
697,161
696,523
0.875% Senior Notes due 2026
496,652
496,038
495,425
4.700% Senior Notes due 2027
240,116
239,899
239,684
4.800% Senior Notes due 2030
132,688
132,602
132,516
1.875% Senior Notes due 2031
495,537
495,254
494,972
5.450% Senior Notes due 2050
146,338
146,299
146,261
Total Long-term debt
$
2,458,615
$
2,456,510
$
2,454,413
Interest on all Senior Notes is payable semi-annually and the Senior Notes are subject to prepayment penalties for early payment of principal.
As of July 29, 2023, January 28, 2023, and July 30, 2022, total unamortized discount and debt issuance costs were $16.4 million, $18.5 million, and $20.6 million, respectively, and were classified as a reduction of Long-term debt.
The aggregate fair value of the seven outstanding series of Senior Notes was approximately $2.3 billion as of July 29, 2023 and January 28, 2023,and approximately $2.4 billion as of July 30, 2022. 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.
Revolving credit facilities.The Company’s $1.3 billion senior unsecured revolving credit facility (“Credit Facility”) expires in February 2027 and may be extended at the Company’s request for up to two additional one-year periods subject to customary conditions. The Credit Facility contains a $300 million sublimit for issuance of standby letters of credit. It also contains an option allowing the Company to increase the size of its Credit Facility by up to an additional $700 million, with the agreement of the committing lenders. Interest on borrowings under this Credit Facility is a term rate based on the
13
Secured Overnight Financing Rate (“Term SOFR”) (or an alternate benchmark rate, if Term SOFR is no longer available) plus an applicable margin and is payable quarterly and upon maturity.
The Credit Facility is subject to a quarterly Consolidated Adjusted Debt to Consolidated EBITDAR financial leverage ratio covenant. As of July 29, 2023, the Company was in compliance with the financial covenant, had no borrowings or standby letters of credit outstanding under the Credit Facility, and the $1.3 billion Credit Facility remained in place and available.
The table below shows the components of interest expense and income for the three and six month periods ended July 29, 2023 and July 30, 2022:
Three Months Ended
Six Months Ended
($000)
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Interest expense on long-term debt
$
21,133
$
21,125
$
42,299
$
42,279
Other interest expense
372
406
745
794
Capitalized interest
(2,818)
(1,175)
(4,926)
(3,826)
Interest income
(55,901)
(9,689)
(106,729)
(10,884)
Interest (income) expense, net
$
(37,214)
$
10,667
$
(68,611)
$
28,363
Note F: Taxes on Earnings
The Company’s effective tax rates for the three month periods ended July 29, 2023 and July 30, 2022, were approximately 25% and 24%, respectively. The Company’s effective tax rate for the six month periods ended July 29, 2023 and July 30, 2022, was approximately 24%. The Company’s effective tax rate is impacted by changes in tax law and accounting guidance, location of new stores, level of earnings, tax effects associated with stock-based compensation, and uncertain tax positions.
As of July 29, 2023, January 28, 2023, and July 30, 2022, the reserves for unrecognized tax benefits were $63.3 million, $60.6 million, and $69.3 million, inclusive of $7.5 million, $7.1 million, and $8.5 million of related interest and penalties, respectively. The Company accounts for interest and penalties related to unrecognized tax benefits as a part of its provision for taxes on earnings. If recognized, $50.6 million would impact the Company’s effective tax rate. It is reasonably possible that certain federal and state tax matters may be concluded or statutes of limitations may lapse during the next 12 months. Accordingly, the total amount of unrecognized tax benefits may decrease by up to $13.1 million. The difference between the total amount of unrecognized tax benefits and the amounts that would impact the effective tax rate relates to amounts attributable to deferred income tax assets and liabilities. These amounts are net of federal and state income taxes.
The Company is open to audit by the Internal Revenue Service under the statute of limitations for fiscal years 2019 through 2022. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years 2018 through 2022. Certain federal and state tax returns are currently under audit by various tax authorities. The Company does not expect the results of these audits to have a material impact on the condensed consolidated financial statements.
14
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 July 29, 2023 and July 30, 2022, the related condensed consolidated statements of earnings, comprehensive income, and stockholders’ equity, for the three and six month periods ended July 29, 2023 and July 30, 2022, and cash flows for the six month periods ended July 29, 2023 and July 30, 2022, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying 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 January 28, 2023, and the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 27, 2023, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 28, 2023, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Deloitte & Touche LLP
San Francisco, California
September 5, 2023
15
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 also those in Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K for fiscal 2022. 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 in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for fiscal 2022. 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 1,722 locations in 41 states, the District of Columbia, and Guam as of July 29, 2023. 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 339 dd’s DISCOUNTS stores in 22 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.
There remains uncertainty in the current macroeconomic and geopolitical environments, and prolonged inflationary pressures continue to negatively impact the discretionary spending of our low-to-moderate income customers. As a result of today’s uncertain external conditions and inflationary pressures, shoppers continue to seek even stronger values when visiting our stores. We plan to carefully manage our expenses and inventory, while closely monitoring market share trends for the off-price industry. We believe our market share can continue to grow through continued focus on bringing value and convenience to our consumers.
Results of Operations
The following table summarizes the financial results for the three and six month periods ended July 29, 2023 and July 30, 2022:
Three Months Ended
Six Months Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Sales
Sales (millions)
$
4,935
$
4,583
$
9,430
$
8,916
Sales growth (decline)
7.7
%
(4.6
%)
5.8
%
(4.3
%)
Comparable store sales growth (decline)1
5
%
(7
%)
3
%
(7
%)
Costs and expenses (as a percent of sales)
Cost of goods sold
72.3
%
74.2
%
72.8
%
74.0
%
Selling, general and administrative
16.4
%
14.5
%
16.5
%
15.0
%
Interest (income) expense, net
(0.8
%)
0.3
%
(0.7
%)
0.3
%
Earnings before taxes (as a percent of sales)
12.1
%
11.0
%
11.4
%
10.7
%
Net earnings (as a percent of sales)
9.0
%
8.4
%
8.7
%
8.1
%
1 Comparable stores are stores open for more than 14 complete months.
16
Stores.Our long-term 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.
We opened 27 new stores in the second quarter of fiscal 2023 and remain on track to open a total of approximately 100 locations this year.
The following table summarizes the stores opened and closed during the three and six month periods ended July 29, 2023 and July 30, 2022:
Three Months Ended
Six Months Ended
Store Count
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Ross Dress for Less
Beginning of the period
1,704
1,648
1,693
1,628
Opened in the period
18
21
29
1
43
Closed in the period
—
—
—
(2)
2
Total Ross Dress for Less stores end of period
1,722
1,669
1,722
1,669
dd’s DISCOUNTS
Beginning of the period
330
303
322
295
Opened in the period
9
8
17
16
Closed in the period
—
—
—
—
Total dd’s DISCOUNTS stores end of period
339
311
339
311
Total stores end of period
2,061
1,980
2,061
1,980
1 Includes the reopening of a store previously temporarily closed due to a weather event.
2 Includes the temporary closure of a store impacted by a weather event.
Sales. Sales for the three month period ended July 29, 2023 increased $351.9 million, or 7.7%, compared to the three month period ended July 30, 2022, primarily due to a 5% comparable store sales increase and the opening of 81 net new stores between July 30, 2022 and July 29, 2023.
Sales for the six month period ended July 29, 2023 increased $513.5 million, or 5.8%, compared to the six month period ended July 30, 2022, primarily due to a 3% comparable store sales increase and the opening of 81 net new stores between July 30, 2022 and July 29, 2023.
Our sales mix for the three and six month periods ended July 29, 2023 and July 30, 2022 is shown below:
Three Months Ended
Six Months Ended
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Home Accents and Bed and Bath
24
%
24
%
25
%
25
%
Ladies
24
%
25
%
24
%
25
%
Men’s
16
%
16
%
15
%
15
%
Accessories, Lingerie, Fine Jewelry, and Cosmetics
15
%
14
%
15
%
14
%
Shoes
13
%
13
%
13
%
13
%
Children’s
8
%
8
%
8
%
8
%
Total
100
%
100
%
100
%
100
%
We intend to address the uncertain and competitive climate for apparel and home goods by pursuing and refining our existing strategies, continuing to strengthen our merchant organization, refining our merchandise mix, and further
17
developing our systems to improve our merchandise offerings. We cannot be sure that our strategies and store expansion program will result in sales growth or an increase in net earnings.
Cost of goods sold. Cost of goods sold for the three and six month periods ended July 29, 2023 increased $169.8 million and $266.0 million, respectively, compared to the three and six month periods ended July 30, 2022, primarily due to the respective 5% and 3% comparable store sales increases, higher sales from the opening of 81 net new stores between July 30, 2022 and July 29, 2023, and higher buying costs, partially offset by lower ocean and domestic freight costs.
Cost of goods sold as a percentage of sales for the three month period ended July 29, 2023 decreased approximately 185 basis points compared to the three month period ended July 30, 2022, primarily due to a 200 basis point increase in merchandise margin mainly due to lower ocean freight costs, a 60 basis point decrease in domestic freight costs, 20 basis points of leverage in occupancy costs, and a 5 basis point decrease in distribution costs. Partially offsetting these items was a 100 basis point increase in buying costs primarily due to higher incentive compensation expense.
Cost of goods sold as a percentage of sales for the six month period ended July 29, 2023 decreased approximately 120 basis points compared to the six month period ended July 30, 2022, primarily due to a 160 basis point increase in merchandise margin mainly due to lower ocean freight costs, a 60 basis point decrease in domestic freight costs, and 10 basis points of leverage in occupancy costs. Partially offsetting these items were an 85 basis point increase in buying costs primarily due to higher incentive compensation expense and a 25 basis point increase in distribution costs primarily due to the deleveraging effect from the opening of our Brookshire, Texas distribution center and higher wages.
We expect lower ocean and domestic freight costs and higher incentive compensation expense to continue through fiscal 2023.
Selling, general and administrative expenses. For the three and six month periods ended July 29, 2023, selling, general and administrative expenses (“SG&A”) increased $140.8 million and $217.6 million, respectively, compared to the three and six month periods ended July 30, 2022. These increases were primarily due to higher incentive compensation expense, higher store wages, and the opening of 81 net new stores between July 30, 2022 and July 29, 2023.
SG&A as a percentage of sales for the three and six month periods ended July 29, 2023 increased 180 and 150 basis points, respectively, compared to the three and six month periods ended July 30, 2022, primarily due to higher incentive compensation expense and higher store wages.
We expect SG&A to continue to increase as a result of higher incentive compensation expense and higher store wages.
Interest (income) expense, net. For the three and six month periods ended July 29, 2023, interest (income) expense, net increased $47.9 million and $97.0 million, respectively, compared to the three and six month periods ended July 30, 2022, primarily due to increased interest income from higher interest rates.
Interest (income) expense, net for the three and six month periods ended July 29, 2023 and July 30, 2022 consists of the following:
Three Months Ended
Six Months Ended
($000)
July 29, 2023
July 30, 2022
July 29, 2023
July 30, 2022
Interest expense on long-term debt
$
21,133
$
21,125
$
42,299
$
42,279
Other interest expense
372
406
745
794
Capitalized interest
(2,818)
(1,175)
(4,926)
(3,826)
Interest income
(55,901)
(9,689)
(106,729)
(10,884)
Interest (income) expense, net
$
(37,214)
$
10,667
$
(68,611)
$
28,363
Taxes on earnings. Our effective tax rates for the three month periods ended July 29, 2023 and July 30, 2022 were approximately 25% and 24%, respectively. Our effective tax rate for the six month periods ended July 29, 2023 and July 30, 2022 was approximately 24%. Our effective tax rate is impacted by changes in tax law and accounting guidance, location of new stores, level of earnings, tax effects associated with stock-based compensation, and uncertain tax positions.
18
Net earnings. Net earnings as a percentage of sales for the three month periods ended July 29, 2023 and July 30, 2022 were 9.0% and 8.4%, respectively. Net earnings as a percentage of sales for the three month period ended July 29, 2023 was higher primarily due to lower cost of goods sold and higher interest income, partially offset by higher SG&A expenses.
Net earnings as a percentage of sales for the six month periods ended July 29, 2023 and July 30, 2022 were 8.7% and 8.1%, respectively. Net earnings as a percentage of sales for the six month period ended July 29, 2023 was higher primarily due to lower cost of goods sold and higher interest income, partially offset by higher SG&A expenses.
Earnings per share. Diluted earnings per share for the three month period ended July 29, 2023 was $1.32 compared to $1.11 for the three month period ended July 30, 2022. Diluted earnings per share for the six month period ended July 29, 2023 was $2.41 compared to $2.08 for the six month period ended July 30, 2022. The $0.21 and $0.33 increases in the diluted earnings per share for the three and six month periods ended July 29, 2023 were primarily attributable to a 16% and 13% increase in net earnings, respectively, and a 3% reduction in weighted-average diluted shares outstanding largely due to stock repurchases under our stock repurchase program.
Financial Condition
Liquidity and Capital Resources
The 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, 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 active stock repurchase programs, pay dividends, and repay debt as it becomes due.
Six Months Ended
($000)
July 29, 2023
July 30, 2022
Cash provided by (used in) operating activities
$
1,116,281
$
(56,265)
Cash used in investing activities
(363,459)
(243,346)
Cash used in financing activities
(719,766)
(718,935)
Net increase (decrease) in cash, cash equivalents, and restricted cash and cash equivalents
$
33,056
$
(1,018,546)
Operating Activities
Net cash provided by operating activities was $1.1 billion for the six month period ended July 29, 2023. This was primarily driven by net earnings excluding non-cash expenses for depreciation, amortization, and stock-based compensation. Net cash used in operating activities was $0.1 billion for the six month period ended July 30, 2022. This was primarily driven by higher packaway inventory receipts and higher associated payments, combined with shorter payment terms, and by payment of fiscal 2021 incentive bonuses, partially offset by net earnings excluding non-cash expenses for depreciation, amortization, and stock-based compensation.
The increase in cash flow provided by operating activities for the six month period ended July 29, 2023 compared to the same period in the prior year was primarily driven by higher accounts payable leverage (defined as accounts payable divided by merchandise inventory), lower incentive compensation payments, and higher net earnings.
Accounts payable leverage was 94% and 77% as of July 29, 2023 and July 30, 2022, respectively. The increase in accounts payable leverage was primarily due to the timing of inventory receipts and related payments versus last year.
As a regular part of our business, packaway inventory levels will vary over time based on availability of compelling merchandise purchase opportunities in the marketplace and our decisions on the timing for release of that inventory to our stores. 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 for 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.
19
Changes in packaway inventory levels impact our operating cash flow. As of July 29, 2023, packaway inventory was 38% of total inventory, compared to 40% at the end of fiscal 2022. As of July 30, 2022, packaway inventory was 41% of total inventory, compared to 40% at the end of fiscal 2021.
Investing Activities
Net cash used in investing activities was $363.5 million and $243.3 million for the six month periods ended July 29, 2023 and July 30, 2022, respectively, and was related to our capital expenditures. 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 and buying and corporate offices.
The increase in cash used in investing activities for the six month period ended July 29, 2023, compared to the same period in the prior year, was primarily due to higher capital expenditures related to the construction of our new Buckeye, Arizona distribution center, the construction and build-out of new stores, and various information technology projects.
Capital expenditures for fiscal 2023 are currently projected to be approximately $800 million. Our planned capital expenditures for fiscal 2023 are for investments in our supply chain to support long-term growth, including construction of our next distribution centers, costs for fixtures and leasehold improvements to open new Ross and dd’s DISCOUNTS stores, investments in information technology systems, and for various other expenditures related to our stores, distribution centers, and buying and corporate offices. We expect to fund capital expenditures with available cash.
Financing Activities
Net cash used in financing activities was $719.8 million and $718.9 million for the six month periods ended July 29, 2023 and July 30, 2022, respectively, primarily resulting from stock repurchases under our current stock repurchase program and payment of dividends.
Revolving credit facilities. We have a $1.3 billion senior unsecured revolving credit facility (“Credit Facility”). As of July 29, 2023, we had no borrowings or standby letters of credit outstanding under the Credit Facility, the $1.3 billion Credit Facility remained in place and available, and we were in compliance with the financial covenant. Refer to Note E: Debtin the Notes to Condensed Consolidated Financial Statements for additional information.
Senior notes. As of July 29, 2023, we had approximately $2.5 billion of outstanding unsecured Senior Notes. Refer to Note E: Debt in the Notes to Condensed Consolidated Financial Statements for additional information.
Other financing activities.In March 2022, our Board of Directors approved a two-year program to repurchase up to $1.9 billion of our common stock through fiscal 2023.
For the six month period ended July 29, 2023, we repurchased 4.3 million shares of common stock for $464.9 million, excluding excise tax due under the Inflation Reduction Act of 2022. We repurchased 5.5 million shares of common stock for $475.0 million during the six month period ended July 30, 2022. During each of the six month periods ended July 29, 2023 and July 30, 2022, we also acquired 0.4 million shares of treasury stock to cover employee tax withholding obligations under our employee equity compensation programs for aggregate purchase prices of approximately $38.4 million and $38.6 million, respectively.
On August 16, 2023, our Board of Directors declared a quarterly cash dividend of $0.335 per common share, payable on September 29, 2023. The Board of Directors declared a cash dividend of $0.335 per common share in February and May 2023, and $0.310 per common share in March, May, August, and November 2022.
For the six month periods ended July 29, 2023 and July 30, 2022, we paid cash dividends of $228.8 million and $217.2 million, respectively.
Short-term trade credit represents a significant source of financing for our 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 credit, and other credit sources to meet our capital and liquidity requirements, including lease and interest payment obligations.
20
We ended the second quarter of fiscal 2023 with $4.6 billion of unrestricted cash balances, which were held primarily in overnight money market funds invested in U.S. treasury and government instruments across a highly diversified set of banks and other financial institutions. We also have $1.3 billion available under our Credit Facility. We estimate that existing cash and cash equivalent balances, cash flows from operations, bank credit, and trade credit are adequate to meet our operating cash needs and to fund our planned capital investments, common stock repurchases, quarterly dividend payments, and interest payment obligations for at least the next 12 months.
Contractual Obligations and Off-Balance Sheet Arrangements
The table below presents our significant contractual obligations as of July 29, 2023:
($000)
Less than one year
Greater than one year
Total¹
Recorded contractual obligations:
Senior notes
$
—
$
2,474,991
$
2,474,991
Operating leases
704,810
2,695,278
3,400,088
New York buying office ground lease2
7,552
1,105,311
1,112,863
Unrecorded contractual obligations:
Real estate obligations3
11,288
180,365
191,653
Interest payment obligations
80,316
394,976
475,292
Purchase obligations4
4,150,967
63,030
4,213,997
Total contractual obligations
$
4,954,933
$
6,913,951
$
11,868,884
1 We have a $59.9 millionliability for unrecognized tax benefits that is included in Other long-term liabilities on our interim Condensed Consolidated Balance Sheet. This liability is excluded from the schedule above as the timing of payments cannot be reasonably estimated.
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 July 29, 2023.
Standby letters of credit and collateral trust. We use standby letters of credit outside of our Credit Facility in addition to a funded trust to collateralize some of our insurance obligations. As of July 29, 2023 and January 28, 2023, we had $2.6 million in standby letters of credit outstanding and $59.1 million and $57.8 million, respectively, in a collateral trust. As of July 30, 2022, we had $3.3 million in standby letters of credit outstanding and $56.9 million in a collateral trust. The standby letters of credit are collateralized by restricted cash and the collateral trust consists of restricted cash and cash equivalents.
Trade letters of credit. We had $33.7 million, $7.6 million, and $26.6 million in trade letters of credit outstanding at July 29, 2023, January 28, 2023, and July 30, 2022, respectively.
Dividends. In August 2023, our Board of Directors declared a cash dividend of $0.335 per common share, payable on September 29, 2023.
Critical Accounting Estimates
During the second quarter of fiscal 2023, there have been no significant changes to the critical accounting estimates discussed in our Annual Report on Form 10-K for the year ended January 28, 2023.
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Forward-Looking Statements
This report contains a number of forward-looking statements regarding, without limitation, projected sales, costs and earnings, planned new store growth, capital expenditures, liquidity, and other matters. These forward-looking statements reflect our then-current beliefs, plans, 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 impact from inflation, interest rate increases, ongoing military conflicts and economic sanctions, the COVID-19 pandemic, climate change, and other economic, regulatory, consumer spending, and industry trends that could potentially adversely affect our revenue, profitability, operating conditions, 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, plans, and projections. Such risks are not limited to but may include:
•Impacts from the macroeconomic environment, including inflation, interest rates, housing costs, energy and fuel costs, financial and credit market conditions, recession concerns, geopolitical conditions (including the current Russia-Ukraine conflict), the COVID-19 pandemic, or public health and public safety issues, that affect our costs, consumer confidence, and consumer disposable income.
•Unexpected changes in the level of consumer spending on, or preferences for, apparel and home-related merchandise, which could adversely affect us.
•Competitive pressures in the apparel and home-related merchandise retailing industry.
•Our need to effectively manage our inventories, markdowns, and inventory shortage in order to achieve our planned gross margins.
•Risks associated with importing and selling merchandise produced in other countries, including risks from supply chain disruption, shipping delays, and higher than expected ocean freight costs.
•Unseasonable weather or extreme temperatures that may affect shopping patterns and consumer demand for seasonal apparel and other merchandise.
•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 anticipate consumer preferences and 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, including from ransomware or other cyber-attacks, 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 new store openings.
•Our need to expand in existing markets and enter new geographic markets in order to achieve planned market penetration.
•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, or the adoption of new federal or state tax legislation that increases tax rates or adds new taxes, 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.
•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.
•An additional public health or public safety crisis, demonstrations, 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 and our new store openings.
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The factors underlying our forecasts are dynamic and subject to change. As a result, any forecasts or forward-looking statements speak only as of the date they are given and do not necessarily reflect our outlook at any other point in time. We disclaim any obligation to update or revise these forward-looking statements.
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 July 29, 2023.
Interest that is payable on our Credit Facility is based on variable interest rates and is therefore affected by changes in market interest rates. As of July 29, 2023, we had no borrowings outstanding under the Credit Facility.
As of July 29, 2023, we have outstanding seven series of unsecured Senior Notes. Interest that is payable on all series of our Senior Notes is based on fixed interest rates, and is therefore unaffected by changes in market interest rates.
We receive interest payments on our cash and cash equivalents and restricted cash and cash equivalents. Changes in interest rates may impact the interest income we recognize in the future.
A hypothetical 100 basis point increase or decrease in prevailing market interest rates would not have had a material negative impact on our condensed consolidated financial position, results of operations, cash flows, or the fair values of our cash and cash equivalents and restricted cash and cash equivalents as of and for the three and six month periods ended July 29, 2023. 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 second fiscal quarter of 2023 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 second fiscal quarter of 2023.
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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 January 28, 2023 for a description of 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 second quarter of fiscal 2023 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
May
(4/30/2023 - 5/27/2023)
585,615
$103.65
585,031
$
654,900
June
(5/28/2023-7/01/2023)
886,786
$105.81
878,528
$
561,920
July
(7/02/2023- 7/29/2023)
688,314
$111.59
688,314
$
485,110
Total
2,160,715
$107.06
2,151,873
$
485,110
1 We acquired 8,842 shares of treasury stock during the quarter ended July 29, 2023. 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 2022, our Board of Directors approved a two-year program to repurchase up to $1.9 billion of our common stock through fiscal 2023.
XBRL Instance Document. (The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.)
Cover Page Interactive Data File. (The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.)
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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.
