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Ross Stores, Inc.
2015 Annual Report
It’s all about the
bargains

Table of contents

  • Page 1
    bargains It's all about the Ross Stores, Inc. 2015 Annual Report

  • Page 2
    It's all about the bargains!

  • Page 3
    ... stores in 34 states, the District of Columbia and Guam, while dd's DISCOUNTS operates 172 stores in 15 states. Ross offers name brand apparel, accessories, footwear and home fashions for the entire family at savings of 20% to 60% off department store and specialty store regular prices every day. dd...

  • Page 4
    ... 12 13 14 15 Return on Average Stockholders' Equity Cash Returned to Stockholders3 ($ millions) 1 2012 results are based on a 53-week fiscal year; all other years are on a 52-week basis. 2 Adjusted for 2-for-1 stock split effective June 2015. 3 Includes cash dividends and stock repurchases.

  • Page 5
    ....6%, benefiting from a combination of higher merchandise gross margin and strong expense control. Ongoing Store Growth and Expansion into Newer Markets As planned, the Company opened 84 net new locations during the year, consisting of 64 Ross Dress for Less and 20 dd's DISCOUNTS. We ended 2015 with...

  • Page 6
    ... values our customers have come to expect. Social Responsibility at Ross The six Ross Dress for Less stores we opened in Northern California in 1982 have grown into the largest off-price apparel and home fashion chain in the United States, with 1,274 locations at the end of 2015. dd's DISCOUNTS...

  • Page 7
    8% 12% Shoes Children's 29% Ladies 13% Men's 13% Accessories, Lingerie, Fine Jewelry, Fragrances 25% Home Accents, Bed and Bath

  • Page 8
    ...of Columbia Florida Georgia 19 60 6 273 31 1 1 152 47 Guam Hawaii Idaho Illinois Indiana Kansas Kentucky Louisiana Maryland 1 17 11 55 8 7 9 15 21 Mississippi Missouri Montana Nevada New Jersey New Mexico North Carolina Oklahoma Oregon 8 17 6 28 12 9 41 21 30 6 | 2015 Annual Report Ross Stores, Inc...

  • Page 9
    1,446 34 84 stores states new stores in 2015 dd's DISCOUNTS Pennsylvania South Carolina Tennessee Texas Utah Virginia Washington Wisconsin Wyoming Total 43 21 28 176 17 36 41 3 3 1,274 Arizona California Florida Georgia Louisiana Maryland Nevada New Jersey New Mexico 11 74 27 8 2 2 4 1 2 North ...

  • Page 10
    ...to make improvements on these initiatives. In closing, we would like to thank all of our associates, customers, business partners and stockholders for their continued support. Sincerely, Michael Balmuth Executive Chairman Barbara Rentler Chief Executive Officer 8 | 2015 Annual Report Ross Stores...

  • Page 11
    Form 10-K Ross Stores, Inc.

  • Page 12
    ... Data Management's Discussion and Analysis Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Report to Independent Registered Public Accounting Firm Signatures Index of Exhibits Certifications 12 30 32 42 46 63 68 69 75 Index to Other Information Directors...

  • Page 13
    ... name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 5130 Hacienda Drive, Dublin, California (Address of principal executive offices) Registrant's telephone number, including area code Title of each class Common stock, par value...

  • Page 14
    ... 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. Ross' target customers are primarily from middle income households. We also operate 172 dd's DISCOUNTS stores in 15 states...

  • Page 15
    ...-price buying strategies is a key factor in our success. Our buyers use a number of methods that enable us to offer our customers brand name and designer merchandise at strong discounts every day relative to department and specialty stores for Ross and moderate department and discount stores for dd...

  • Page 16
    ... shopping centers in heavily populated urban and suburban areas. Where the size of the market and real estate opportunities permit, we cluster Ross stores to benefit from economies of scale in advertising, distribution, and field management. We do the same for dd's DISCOUNTS stores. We believe a key...

  • Page 17
    ... the Company and our employees to be good. Competition We believe the principal competitive factors in the off-price retail apparel and home fashion industry are offering significant discounts on brand name merchandise, offering a well-balanced assortment that appeals to our target customers, and...

  • Page 18
    ..., the retail apparel market is highly fragmented and competitive. We face a challenging macro-economic and retail environment that creates intense competition for business from department stores, specialty stores, discount stores, warehouse stores, other off-price retailers, and manufacturer-owned...

  • Page 19
    ... other forms of retail commerce, for customers, associates, store locations, and merchandise. Our retail competitors constantly adjust their pricing, business strategies and promotional activity (particularly during holiday periods) in response to changing conditions. The substantial sales growth in...

  • Page 20
    ... 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. Opportunistic buying, lean inventory levels...

  • Page 21
    ... stores, track inventory flow, manage merchandise allocation and distribution logistics, generate performance and financial reports, and support merchandising decisions. We are currently making, and will continue to make, significant technology investments to improve or replace information processes...

  • Page 22
    ... securities, real estate, tort, consumer protection, privacy, product compliance and safety, advertising, comparative pricing, intellectual property, tax, escheat, and whistle-blower claims. We continue to be involved in a number of employment-related lawsuits, including class actions in California...

  • Page 23
    ... necessary to execute our off-price retail strategies. Like other retailers, we face challenges in recruiting and retaining sufficient talent in our buying organization, management, and other key areas. Many of our retail store associates are in entry level or part-time positions with historically...

  • Page 24
    ...in any of our markets could disrupt our operations or our supply chain, or could shut down, damage, or destroy our stores or distribution facilities. To support our continuing operations, our new store and distribution center growth plans, and our stock repurchase program and quarterly dividends, we...

  • Page 25
    ... dd's DISCOUNTS store size is 23,300 square feet. During fiscal 2015, no one store accounted for more than 1% of our sales. We carry earthquake insurance to help mitigate the risk of financial loss due to an earthquake. Our real estate strategy in 2016 is to primarily open stores in states...

  • Page 26
    ... California Colorado Delaware District of Columbia Florida Georgia Guam Hawaii Idaho Illinois Indiana Kansas Kentucky Louisiana Maryland Mississippi Missouri Montana Nevada New Jersey New Mexico North Carolina Oklahoma Oregon Pennsylvania South Carolina Tennessee Texas Utah Virginia Washington...

  • Page 27
    ... area of the facility. Square footage information for office space represents total space owned and leased. See additional discussion in Management's Discussion and Analysis. Location Distribution centers Carlisle, Pennsylvania Fort Mill, South Carolina Moreno Valley, California Perris, California...

  • Page 28
    ..., Merchandising, Ross Dress for Less President and Chief Development Officer President and Chief Merchandising Officer, dd's DISCOUNTS President and Chief Operating Officer President, Merchandising, Ross Dress for Less Executive Vice President, Finance and Legal, and Corporate Secretary Group Senior...

  • Page 29
    ... Design from 1991 to 2005. He joined the Company in 1988 as Vice President of Real Estate. Prior to joining Ross, Mr. Fassio held various retail and real estate positions with Safeway Stores, Inc. Mr. Morrow has served as President and Chief Merchandising Officer, dd's DISCOUNTS since December 2015...

  • Page 30
    ... repurchase program. In February 2015, our Board of Directors approved a two-year $1.4 billion stock repurchase program for fiscal 2015 and 2016. See Note H of Notes to Consolidated Financial Statements for equity compensation plan information. The information under Item 12 of this Annual Report on...

  • Page 31
    ... performance. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN Among Ross Stores, Inc., the S&P 500 Index, and S&P Retailing Group Indexed Returns for Years Ended Company / Index Base Period 2011 2012 2013 2014 2015 2016 Ross Stores, Inc. S&P 500 Index S&P Retailing Group 100 100 100 158 104 116...

  • Page 32
    ...and Results of Operations," the section "Forward-Looking Statements" in this Annual Report on Form 10-K and our consolidated financial statements and notes thereto. ($000, except per share data) 2015 2014 2013 20121 2011 Operations Sales Cost of goods sold Percent of sales Selling, general and...

  • Page 33
    ... ($000, except per share data) 2015 2014 2013 20121 2011 Financial Position Cash and cash equivalents Merchandise inventory Property and equipment, net Total assets 2, 3 $ 761,602 1,419,104 2,342,906 4,869,119 21% 769,348 1.5:1 396,025 14% 2,471,991 43% $ 696,608 1,372,675 2,273,...

  • Page 34
    ... January 30, 2016. 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 172 dd's DISCOUNTS stores in 15 states as of...

  • Page 35
    ... by continuing to strengthen our organization, diversify our merchandise mix, and more fully develop our systems to improve regional and local merchandise offerings. Although our strategies and store expansion program contributed to sales gains in fiscal 2015, 2014, and 2013, we cannot be sure that...

  • Page 36
    ... 2015, 2014 and 2013 were approximately 37%, 38% and 38%, respectively. 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 rate is impacted by changes in laws, location...

  • Page 37
    ... for merchandise inventory purchases, payroll, rent, taxes, and capital expenditures in connection with new and existing stores, and investments in distribution centers, information systems, and buying and corporate offices. We also use cash to repurchase stock under our stock repurchase program and...

  • Page 38
    ... 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...

  • Page 39
    ... during fiscal 2015, 2014, and 2013, respectively. In February 2015, our Board of Directors approved a two-year $1.4 billion stock repurchase program for fiscal 2015 and 2016. On March 1, 2016, our Board of Directors declared a quarterly cash dividend of $0.1350 per common share, payable on March...

  • Page 40
    ... our New York buying office. Except for certain leasehold improvements and equipment, these leased locations do not represent long-term capital investments. Two of the warehouses are in Carlisle, Pennsylvania with leases expiring in 2016 and 2017. The third warehouse is in Fort Mill, South Carolina...

  • Page 41
    ... which contain accounting policies and other disclosures required by GAAP. Merchandise inventory. Our merchandise inventory is stated at the lower of cost (determined using a weighted average basis) or net realizable value. We purchase inventory that can either be shipped to stores or processed as...

  • Page 42
    ...fiscal 2015, and information we provide in our Annual Report to Stockholders, press releases, and other investor communications including those on our corporate website, may contain a number of forwardlooking statements regarding, without limitation, planned store growth, new markets, expected sales...

  • Page 43
    ...is, therefore, affected by changes in market interest rates. As of January 30, 2016, we had no borrowings outstanding under our revolving credit facility. We have two outstanding series of unsecured notes held by institutional investors: Series A Senior Notes due December 2018 for $85 million accrue...

  • Page 44
    ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statements of Earnings ($000, except per share data) Year Ended January 30, 2016 Year Ended January 31, 2015 Year Ended February 1, 2014 Sales Costs and Expenses Cost of goods sold Selling, general and administrative Interest expense ...

  • Page 45
    ... share data) January 30, 2016 January 31, 2015 Assets Current Assets Cash and cash equivalents Short-term investments Accounts receivable Merchandise inventory Prepaid expenses and other Total current assets Property and Equipment Land and buildings Fixtures and equipment Leasehold improvements...

  • Page 46
    ...at January 31, 2015 Net earnings Unrealized investment loss, net Common stock issued under stock plans, net of shares used for tax withholding Tax benefit from equity issuance Stock-based compensation Common stock repurchased Dividends declared ($0.470 per share) Balance at January 30, 2016 441,442...

  • Page 47
    ... tax benefit from stock-based compensation Change in assets and liabilities: Merchandise inventory Other current assets Accounts payable Other current liabilities Other long-term, net Net cash provided by operating activities Cash Flows From Investing Activities Additions to property and equipment...

  • Page 48
    ...Accounting Policies Business. Ross Stores, Inc. and its subsidiaries (the "Company") is an off-price retailer of first-quality, in-season, name brand and designer apparel, accessories, footwear, and home fashions for the entire family. At the end of fiscal 2015, the Company operated 1,274 Ross Dress...

  • Page 49
    ... merchandise inventory counts and cycle counts. Cost of goods sold. In addition to product costs, the Company includes in cost of goods sold its buying, distribution and freight expenses as well as occupancy costs, and depreciation and amortization related to the Company's retail stores, buying...

  • Page 50
    ... 30, 2016 and January 31, 2015, respectively. Operating costs, including depreciation, of stores to be closed are expensed during the period they remain in use. In 2015, the Company closed six stores. In 2014, the Company closed nine stores. Accounts payable. Accounts payable represents amounts...

  • Page 51
    .... The Company recognizes income from stored value card breakage as a reduction of operating expenses when redemption by a customer is considered to be remote. Income recognized from breakage was not significant in fiscal 2015, 2014, and 2013. Sales tax collected is not recognized as revenue and is...

  • Page 52
    ... to be taken on a tax return, in order for those tax positions to be recognized in the consolidated financial statements. See Note F. Treasury stock. The Company records treasury stock at cost. Treasury stock includes shares purchased from employees for tax withholding purposes related to vesting of...

  • Page 53
    ...for those goods or services. ASU 2014-09 is effective for the Company's annual and interim reporting periods beginning in fiscal 2018. The Company is currently evaluating the effect that adoption of this new guidance will have on its consolidated financial statements. In February 2016, the Financial...

  • Page 54
    ...The underlying assets in the Company's non-qualified deferred compensation program as of January 30, 2016 and January 31, 2015 (included in Other long-term assets and in Other long-term liabilities) primarily consist of participantdirected money market, stable value, stock, and bond funds. The fair...

  • Page 55
    ... purchase rights equal to the value of the 15% discount given on the purchase date. Total stock-based compensation recognized in the Company's Consolidated Statements of Earnings for fiscal 2015, 2014, and 2013 is as follows: Statements of Earnings Classification ($000) Cost of goods sold Selling...

  • Page 56
    ... the fair value measurements and disclosures guidance. The following table shows scheduled annual principal payments on Long-term debt: ($000) 2016 2017 2018 2019 2020 Thereafter The table below shows the components of interest expense and income for fiscal 2015, 2014, and 2013: ($000) 2015 2014...

  • Page 57
    ..., the Company has a ground lease related to its New York buying office. The aggregate future minimum annual lease payments under leases, including the ground lease related to the New York buying office, in effect at January 30, 2016 are as follows: ($000) Total operating leases 2016 2017 2018 2019...

  • Page 58
    ...2014 35% 3% 38% 2013 35% 3% 38% The components of deferred taxes at January 30, 2016 and January 31, 2015 are as follows: ($000) 2015 2014 Deferred Tax Assets Accrued liabilities Deferred compensation Stock-based compensation Deferred rent California franchise taxes and credits Employee benefits...

  • Page 59
    ...to the plan limits. Company matching contributions to the 401(k) plan were $12.7 million, $11.4 million, and $10.4 million in fiscal 2015, 2014, and 2013, respectively. The Company also has an Incentive Compensation Plan which provides cash awards to key management and employees based on Company and...

  • Page 60
    ...Note H: Stockholders' Equity Common stock. In February 2015, the Company's Board of Directors approved a two-year $1.4 billion stock repurchase program for fiscal 2015 and 2016. The following table summarizes the Company's stock repurchase activity in fiscal 2015, 2014, and 2013: Shares repurchased...

  • Page 61
    ...closing market value on the last business day of fiscal year 2015 (or $56.26), was $343.4 million. A total of 12.7 million, 13.3 million, and 14.0 million shares were available for new restricted stock awards at the end of fiscal 2015, 2014, and 2013, respectively. During fiscal 2015, 2014, and 2013...

  • Page 62
    ...134,000 in fiscal 2015, 2014, and 2013, respectively. Note J: Litigation, Claims, and Assessments Like many retailers, the Company has been named in class action lawsuits, primarily in California, alleging violation of wage and hour laws and consumer protection laws. Class action litigation remains...

  • Page 63
    ...) Summarized quarterly financial information for fiscal 2015 and 2014 is presented in the tables below. Year ended January 30, 2016: Quarter Ended ($000, except per share data) May 2, 2015 August 1, 2015 October 31, 2015 January 30, 2016 Sales Cost of goods sold Selling, general and administrative...

  • Page 64
    ...August 2, 2014 November 1, 2014 January 31, 2015 Sales Cost of goods sold Selling, general and administrative Interest (income) expense, net Total costs and expenses Earnings before taxes Provision for taxes on earnings Net earnings Earnings per share - basic1,2 Earnings per share - diluted1,2 Cash...

  • Page 65
    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Ross Stores, Inc.: We have audited the accompanying consolidated balance sheets of Ross Stores, Inc. and subsidiaries (the "Company") as of January 30, 2016 and January 31, 2015, and the related ...

  • Page 66
    ... events. Management's Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is designed to...

  • Page 67
    ... for Senior Financial Officers by posting any changed version on the same corporate website. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 402 of Regulation S-K is incorporated herein by reference to the sections of the Proxy Statement entitled "Compensation of Directors" and...

  • Page 68
    ...." ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information concerning principal accountant fees and services will appear in the Proxy Statement in the Ross Stores, Inc. Board of Directors Audit Committee Report under the caption "Summary of Audit, Audit-Related, Tax and All Other Fees...

  • Page 69
    ... 30, 2016, January 31, 2015, and February 1, 2014. Notes to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm. 2. List of Consolidated Financial Statement Schedules. Schedules are omitted because they are not required, not applicable, or such information is...

  • Page 70
    ... by the undersigned, thereunto duly authorized. ROSS STORES, INC. (Registrant) By: /s/Barbara Rentler Barbara Rentler Chief Executive Officer Date: March 29, 2016 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on...

  • Page 71
    ... and Restated Ross Stores, Inc. Employee Stock Purchase Plan, Amended and Restated on March 11, 2015, incorporated by reference to Exhibit 10.1 filed by Ross Stores, Inc. for its quarter ended August 1, 2015. Amended and Restated Ross Stores, Inc. 1991 Outside Directors Stock Option Plan, as amended...

  • Page 72
    ...by reference to Exhibit 10.7 to the Form 10-Q filed by Ross Stores, Inc. for its quarter ended May 5, 2007. Form of Stock Option Agreement for Non-Employee Directors for options granted pursuant to Ross Stores, Inc. 2004 Equity Incentive Plan, incorporated by reference to Exhibit 10.3 to the Form 10...

  • Page 73
    ..., Inc., incorporated by reference to Exhibit 10.4 filed by Ross Stores, Inc. for its quarter ended May 2, 2015. Third Amendment to Retirement Benefit Package Agreement effective January 1, 2016 between Norman A. Ferber and Ross Stores, Inc. Employment Agreement effective May 31, 2001 between Michael...

  • Page 74
    ... ended August 1, 2015. Second Amendment to Employment Agreement effective January 1, 2016 between Michael Balmuth and Ross Stores, Inc. Notice of Grant of Restricted Stock Units and Restricted Stock Units Agreement pursuant to the Ross Stores, Inc. 2008 Equity Incentive Plan to Michael Balmuth...

  • Page 75
    ...101.DEF 101.LAB 101.PRE Certification of Chief Executive Officer Pursuant to Sarbanes-Oxley Act Section 302(a). Certification of Chief Financial Officer Pursuant to Sarbanes-Oxley Act Section 302(a). Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. Certification of Chief...

  • Page 76
    ... statements of Ross Stores, Inc. and subsidiaries (the "Company"), and the effectiveness of the Company's internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended January 30, 2016. /s/DELOITTE & TOUCHE LLP San Francisco, California...

  • Page 77
    ... Chief Executive Officer Pursuant to Sarbanes-Oxley Act Section 302(a) I, Barbara Rentler, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Ross Stores, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material...

  • Page 78
    ... Financial Officer Pursuant to Sarbanes-Oxley Act Section 302(a) I, Michael J. Hartshorn, certify that: 1. 2. I have reviewed this annual report on Form 10-K of Ross Stores, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material...

  • Page 79
    ...-Oxley Act of 2002 In connection with the Annual Report of Ross Stores, Inc. (the "Company") on Form 10-K for the year ended January 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Barbara Rentler, as Chief Executive Officer of the Company, hereby...

  • Page 80
    ... Chief Development Officer Brian Morrow President and Chief Merchandising Officer, dd's DISCOUNTS Michael O'Sullivan President and Chief Operating Officer 1, 3, 4 Management Consultant; Audit Committee Compensation Committee Nominating & Corporate Governance Committee Lead Independent Director

  • Page 81
    ... A copy of the Company's 2015 Annual Report on Form 10-K as filed with the Securities and Exchange Commission is available on our corporate website, or without charge, by contacting the following: Investor Relations Department Ross Stores, Inc. 5130 Hacienda Drive Dublin, CA 94568-7579 Telephone...

  • Page 82
    Ross Stores, Inc. 5130 Hacienda Drive Dublin, CA 94568-7579 (925) 965-4400 www.rossstores.com Sustainable Choice. Reduce, Reuse & Recycle. To minimize our environmental impact, the Ross Stores 2015 Annual Report was printed on paper containing fibers from environmentally appropriate, socially bene...