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Delivering:
bargains
growth
results
Ross Stores, Inc.
2006 Annual Report
this is how we got here
this is how we got here
bargains
growth
results

Table of contents

  • Page 1
    Delivering: bargains growth results this is how we got here this is how we got here Ross Stores, Inc. 2006 Annual Report

  • Page 2
    ross stores, inc. this is how we got here 2nd Largest off-price apparel retailer in the United States

  • Page 3

  • Page 4
    ross stores, inc. this is how we got here 797 Locations in 27 states and Guam

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  • Page 6
    ross stores, inc. this is how we got here $5.6 Billion in sales for fiscal year 2006

  • Page 7

  • Page 8
    ross stores, inc. this is how we got here 25% Growth in EPS for fiscal year 2006

  • Page 9

  • Page 10
    ...-hunt nature of her shopping experiences at Ross Dress for Less® and dd's DISCOUNTS®. It's the wide assortments of fresh and exciting name-brand fashions for the family and the home-all at everyday low prices-and new truckloads of merchandise that arrive up to ive days a week that keep her coming...

  • Page 11
    ...department and discount store regular prices. Alabama Arizona California** Colorado Delaware Florida Georgia Guam Hawaii Idaho Louisiana Maryland Mississippi Montana 11 38 223 25 1 87 40 1 11 8 9 16 3 5 Nevada 14 New Jersey 8 New Mexico 5 North Carolina 26 Oklahoma 13 Oregon 21 Pennsylvania 22 South...

  • Page 12
    ... will give us the ability to self-fund store growth and ongoing investments in our distribution center network in 2007. In addition, we plan to continue to return excess cash to stockholders through our stock repurchase and dividend programs. We recently announced a 25% increase in our quarterly...

  • Page 13
    ... and focus in 2006, driving ongoing growth and results for the year: • We continued to do what we do best-delivering bargains every day to our customers. • We also continued to expand our footprint-adding 63 net new locations to end the year with 797 stores in 27 states and Guam. • And we...

  • Page 14
    ..., name-brand and fashion apparel, accessories, footwear and home merchandise for the entire family at everyday savings of 20% to 70% off moderate department and discount store regular prices. Sales and proit trends at dd's DISCOUNTS in 2006 were better than expected and also showed improvement over...

  • Page 15
    ... in established topperforming markets including California, Florida, Texas, Arizona, Colorado and Oklahoma. About half of the 40 former Albertsons sites are planned to reopen as Ross Dress for Less stores and half as dd's DISCOUNTS. The solid progress we made in 2006 with dd's DISCOUNTS gives us the...

  • Page 16
    Ross Stores, Inc. 4440 Rosewood Drive Pleasanton, CA 94588-3050 (925) 965-4400 www.rossstores.com

  • Page 17
    10k ross stores, inc. 2006 Ross Stores, Inc. 2006 Annual Report

  • Page 18
    ... Financial Data Management's Discussion & Analysis Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Signatures Index to Exhibits Certiications Index of Other Information Directors and Oficers Corporate Data...

  • Page 19
    ... file number 0-14678 Ross Stores, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 4440 Rosewood Drive, Pleasanton, California (Address of principal executive offices) Registrant's telephone number, including area...

  • Page 20
    ..., purchasing and pricing, to the locations of our stores, are aimed at these customer bases. Ross offers first-quality, in-season, name-brand and designer apparel, accessories, footwear and home merchandise for the entire family at everyday savings of 20% to 60% off department and specialty store...

  • Page 21
    ... to effectively execute certain off-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 fashion merchandise at strong everyday discounts relative to department and specialty stores for Ross and moderate...

  • Page 22
    ...-price department and specialty stores due to (i) a store design that creates a self-service retail format and (ii) the utilization of labor saving technologies. • Economies of scale with respect to general and administrative costs as a result of centralized merchandising, marketing and purchasing...

  • Page 23
    ... times per week depending on location. We believe that our existing distribution centers with their expansion capabilities will provide adequate processing capacity to support store growth into fiscal year 2008. Information Systems In fiscal 2006, we continued to invest in new systems and technology...

  • Page 24
    ... on brand-name merchandise, offering a well-balanced assortment appealing to our target customer, and consistently providing store environments that are convenient and easy to shop. To execute this concept, we have invested in our buying organization and developed a merchandise allocation system to...

  • Page 25
    ... timely and cost-effective manner. • A change in the availability, quality or cost of new store real estate locations. • A downturn in the economy or a natural disaster in California or in another region where we have a concentration of stores or a distribution center. Our corporate headquarters...

  • Page 26
    ... our dd's DISCOUNTS locations are currently in California. During fiscal 2006, no one store accounted for more than 1% of our sales. We carry earthquake insurance to mitigate our risk on our corporate headquarters, distribution centers, buying offices, and all of our stores. Our real estate strategy...

  • Page 27
    ...State/Territory February 3, 2007 January 28, 2006 Alabama Arizona California Colorado Delaware Florida Georgia Guam Hawaii Idaho Louisiana Maryland Mississippi Montana Nevada New Jersey New Mexico North Carolina Oklahoma Oregon Pennsylvania South Carolina Tennessee Texas Utah Virginia Washington...

  • Page 28
    ... three of these properties are used to store our packaway inventory. See additional discussion under "Distribution" in Item 1. Corporate Headquarters The Company leases approximately 181,000 square feet of office space for our corporate headquarters in Pleasanton, California, under several facility...

  • Page 29
    ... advice to retail, consumer goods, financial services and private equity clients. Ms. Panattoni has served as Executive Vice President, Merchandising since October 2005. She joined the Company as Senior Vice President and General Merchandise Manager, Home in January 2005. In December 2006, she was...

  • Page 30
    ... related to income tax withholdings for restricted stock. All remaining shares were repurchased under the two-year $400.0 million stock repurchase program announced in November 2005. See Note H to Notes to Consolidated Financial Statements for equity compensation plan information and Item 12 for...

  • Page 31
    ... Retailing Group *$100 invested on 1/31/02 in stock or index including reinvestment of dividends. Fiscal year ending January 31. Indexed Returns for Years Ending Base Period January 2002 Company / Index January 2003 January 2004 January January 2005 January 2006 January 2007 Ross Stores Inc...

  • Page 32
    ... fiscal years presented were 52 weeks. In periods prior to fiscal 2006, stock-based compensation expense and incentive compensation expense were included in selling, general and administrative expenses. In accordance with the Company's implementation of Statement of Financial Accounting Standards...

  • Page 33
    ... Return on average stockholders' equity Book value per common share outstanding at year-end Operating Statistics Number of stores opened Number of stores closed Number of stores at year-end Comparable store sales increase (decrease) (52-week basis) Sales per square foot of selling space 3 (52-week...

  • Page 34
    ... 771 Ross locations in 27 states and Guam, and 26 dd's DISCOUNTS stores in California. Ross offers first-quality, in-season, name-brand and designer apparel, accessories, footwear and home fashions at everyday savings of 20% to 60% off department and specialty store regular prices. dd's DISCOUNTS...

  • Page 35
    ... Statements for more information on our stock-based compensation plans and implementation of SFAS No. 123(R). Cost of goods sold. Cost of goods sold in fiscal 2006 increased $464.9 million compared to the prior year mainly due to increased sales from the opening of 63 net new stores during the year...

  • Page 36
    ... point decrease in store operating and advertising costs, both of which benefited from leverage on the 6% increase in sales from comparable stores. The largest component of SG&A is payroll. The total number of employees, including both full and part-time, as of fiscal year end 2006, 2005, and 2004...

  • Page 37
    ... new store merchandise inventory purchases, capital expenditures in connection with opening new stores, and investments in distribution centers, information systems and infrastructure. In 2006 we also used cash to repay debt, repurchase stock under our stock repurchase program and to pay dividends...

  • Page 38
    ... improvements to open both new Ross and dd's DISCOUNTS stores, the relocation, or upgrade of existing stores, and investments in store and merchandising systems, distribution center land, buildings, equipment and systems, and various buying and corporate office expenditures. We expect to fund...

  • Page 39
    ... with these covenants. Off-Balance Sheet Arrangements Operating leases. Substantially all of our store sites, one of our distribution centers, and our buying offices and corporate headquarters are leased and, except for certain leasehold improvements and equipment, do not represent long-term...

  • Page 40
    ... inventory purchase orders, commitments related to store fixtures and supplies, and information technology service and maintenance contracts. Merchandise inventory purchase orders of $788.1 million represent purchase obligations of less than one year as of February 3, 2007. Commercial Credit...

  • Page 41
    ...Albertsons sites in California, Florida, Texas, Arizona, Colorado and Oklahoma. We plan to incorporate about 40 of these sites into our 2007 expansion program. This real estate opportunity allowed us to acquire a substantial number of store sites in several of our established, top performing markets...

  • Page 42
    ... of operating cash flows in the consolidated Statements of Cash Flows. Self-insurance. We self insure certain of our workers' compensation and general liability risks as well as certain coverages under our health plans. Our self-insurance liability is determined actuarially, based on claims filed...

  • Page 43
    ... 2006, and information we provide in our Annual Report to Stockholders, press releases, telephonic reports and other investor communications including on our website, may contain a number of forwardlooking statements regarding, without limitation, planned store growth, new markets, expected sales...

  • Page 44
    Item 8. Financial Statements and Supplementary Data. Consolidated Statements of Earnings ($000, except per share data) Year ended February 3, 2007 Year ended January 28, 2006 Year ended January 29, 2005 Sales Costs and expenses Cost of goods sold Selling, general and administrative Impairment ...

  • Page 45
    Consolidated Balance Sheets ($000, except share data) February 3, 2007 January 28, 2006 Assets Current Assets Cash and cash equivalents Short-term investments Accounts receivable Merchandise inventory Prepaid expenses and other Deferred income taxes Total current assets Property and Equipment Land ...

  • Page 46
    ... income Common stock issued under stock plans, net of shares used for tax withholding Tax benefit from equity issuance Amortization of deferred compensation Common stock repurchased Dividends declared Balance at January 28, 2006 Reclassification of deferred compensation Comprehensive income...

  • Page 47
    ... issuance Excess tax benefits from stock-based compensation Change in assets and liabilities: Merchandise inventory Other current assets, net Accounts payable Other current liabilities Other long-term, net Net cash provided by operating activities Cash Flows Used in Investing Activities Purchase of...

  • Page 48
    ...accessories for the entire family, as well as gift items, linens and other home-related merchandise. At the end of fiscal 2006, there were 771 Ross Dress for Less® ("Ross") locations in 27 states and Guam and 26 dd's DISCOUNTS® stores in California, which are supported by four distribution centers...

  • Page 49
    ...respectively, are included in fixtures and equipment and are amortized over their estimated useful life generally ranging from five to seven years. In May 2006, the Company exercised its option to purchase its Fort Mill, South Carolina distribution center and paid cash in the amount of $87.3 million...

  • Page 50
    ... 28, 2006, respectively. The Company includes the changes in book cash overdrafts in operating cash flows. Self-insurance. The Company is self-insured for workers' compensation, general liability costs and certain medical plans. The self-insurance liability is determined actuarially, based on claims...

  • Page 51
    ...This new accounting standard requires recognition of compensation expense based upon the grant date fair value of all stock-based awards, typically over the vesting period. See Note C for more information on the Company's stock-based compensation plans and implementation of SFAS No. 123(R). Taxes on...

  • Page 52
    ... the Company's operating results or financial position. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" ("SFAS No. 158"), effective for fiscal years ending after December 15, 2006. This statement requires recognition...

  • Page 53
    Note B: Investments The amortized cost and fair value of the Company's available-for-sale securities as of February 3, 2007 were as follows: ($000) Amortized cost Unrealized gains Unrealized losses Fair value Short-term Long-term Auction-rate securities Asset-backed securities Corporate ...

  • Page 54
    ... using the BlackScholes option pricing model and the following weighted average assumptions: Stock Options Expected life from grant date (years) Expected volatility Risk-free interest rate Dividend yield Employee Stock Purchase Plan Expected life from grant date (years) Expected volatility Risk-free...

  • Page 55
    Total stock-based compensation recognized in the Company's consolidated Statements of Earnings for fiscal 2006, 2005 and 2004 is as follows (in $000): Statements of Earnings Classification Cost of good sold Selling, general and administrative Total 2006 2005 2004 $ 11,475 15,205 $ 26,680 $ 7,...

  • Page 56
    ... was made in 2002 to finance equipment and information systems for the Company's Perris, California distribution center. Senior Notes. In October 2006, the Company entered into a Note Purchase Agreement with various institutional investors for $150.0 million of unsecured senior notes. The notes were...

  • Page 57
    ...,000 square feet of office space for its corporate headquarters in Pleasanton, California, under various facility leases. The lease terms for these facilities generally expire between 2010 and 2014 and contain renewal provisions. In October 2004, the Company entered into a lease arrangement to use...

  • Page 58
    ... 2006, 2005 and 2004, respectively. The Company also has an Incentive Compensation Plan, which provides cash awards to key management employees based on the Company's and the individual's performance. The Company also makes available to management a Non-qualified Deferred Compensation Plan which...

  • Page 59
    ...Fiscal Year 2006 2005 2004 7.1 6.4 6.5 $ 28.17 $ 27.26 $ 26.77 $ 200.0 $ 175.0 $ 175.0 Dividends. In January 2007, the Company's Board of Directors declared a quarterly cash dividend payment of $.075 per common share, payable on or about March 30, 2007. The Company's Board of Directors declared...

  • Page 60
    ... at the date of grant is amortized to expense ratably over the vesting period of generally two to four years. The unamortized compensation expense at February 3, 2007 and January 28, 2006 was $27.4 million and $29.4 million, respectively. During fiscal 2006, 2005 and 2004, shares purchased for tax...

  • Page 61
    ...'s apparel purchases at fair market value in fiscal 2006, 2005 and 2004, respectively. Note J: Provision for Litigation Expense and Other Legal Proceedings Like many California retailers, the Company has been named in class action lawsuits regarding misclassification of assistant store managers. In...

  • Page 62
    ... information for fiscal 2006 and 2005 is presented in the tables below. Year ended February 3, 2007: Quarter ended April 29, 2006 Quarter ended July 29, 2006 Quarter ended October 28, 2006 Quarter ended February 3, 20071 ($000, except per share data) Sales Cost of goods sold Selling, general...

  • Page 63
    ... that relates to personnel in the merchandising and distribution organizations from selling, general and administrative expense to cost of goods sold. See also Notes to Consolidated Financial Statements. 3 Ross Stores, Inc. common stock trades on The NASDAQ Stock Market ® under the symbol ROST. 45

  • Page 64
    Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Ross Stores, Inc. Pleasanton, California We have audited the accompanying consolidated balance sheets of Ross Stores, Inc. and subsidiaries (the "Company") as of February 3, 2007 and January 28, 2006, and the...

  • Page 65
    ... Organizations of the Treadway Commission. As discussed in Notes A and C to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), "Share Based Payments," effective January 29, 2006. /s/Deloitte & Touche LLP San Francisco, California...

  • Page 66
    ... accounting firm, as stated in their report which is included in this Annual Report on Form 10-K. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of controls, however well designed and operated...

  • Page 67
    ... Proxy Statement under the section entitled "Information Regarding Nominees and Incumbent Directors" under the caption "Audit Committee." Our Board of Directors has adopted a Code of Ethics for Senior Financial Officers that applies to the Company's Chief Executive Officer, Chief Operations Officer...

  • Page 68
    ...Certain Transactions." 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...

  • Page 69
    ... the years ended February 3, 2007, January 28, 2006 and January 29, 2005. Consolidated Statements of Cash Flows for the years ended February 3, 2007, January 28, 2006 and January 29, 2005. Notes to Consolidated Financial Statements. Report of Independent Registered Public Accounting Firm. 2. List of...

  • Page 70
    ..., thereunto duly authorized. ROSS STORES, INC. (Registrant) Date: April 3, 2007 By: /s/Michael Balmuth Michael Balmuth Vice Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following...

  • Page 71
    ... quarter ended October 28, 2006. 10.1 Lease dated July 23, 2003 of Certain Property located in Perris, California, incorporated by reference to Exhibit 10.1 to the Form 10-Q filed by Ross Stores, Inc. for its quarter ended August 2, 2003. Management Contracts and Compensatory Plans (Exhibits 10.2-10...

  • Page 72
    ... 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-Q filed by Ross Stores, Inc. for its quarter ended July 30, 2005. 10.17 Form of Indemnity Agreement between Ross Stores, Inc. and Executive...

  • Page 73
    ... of Independent Registered Public Accounting Firm dated December 5, 2006, incorporated by reference to Exhibit 15 to the Form 10-Q filed by Ross Stores, Inc. for its quarter ended October 28, 2006. 31.1 31.2 32.1 32.2 Certification of Chief Executive Officer Pursuant to Sarbanes-Oxley Act Section...

  • Page 74
    ... Chief Executive Officer Pursuant to Sarbanes-Oxley Act Section 302(a) I, Michael Balmuth, 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 75
    ... of Chief Financial Officer Pursuant to Sarbanes-Oxley Act Section 302(a) I, John G. Call, 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 76
    ... information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: April 3, 2007 /s/Michael Balmuth Michael Balmuth Vice Chairman, President and Chief Executive Officer A signed original of this written statement...

  • Page 77
    ... in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: April 3, 2007 /s/J. Call John G. Call Senior Vice President, Chief Financial Officer, Principal Accounting Officer and Corporate Secretary A signed original of this...

  • Page 78
    ... Chief Executive Officer Ross Stores, Inc. K. Gunnar Bjorklund 2, 3 Managing Director, General Partner Sverica International Michael J. Bush 1, 3 Managing Member B IV Investments, LLC Former President and Chief Executive Officer Anchor Blue Retail Group Sharon D. Garrett 1, 3 Chief Operating Officer...

  • Page 79
    Corporate Data Corporate Headquarters Ross Stores, Inc. 4440 Rosewood Drive Pleasanton, California 94588-3050 (925) 965-4400 Corporate Website: www.rossstores.com New York Buying Ofice Ross Stores, Inc. 1372 Broadway, 10th Floor New York, New York 10018 (212) 819-3100 Los Angeles Buying Ofice Ross ...

  • Page 80
    Ross Stores, Inc. 4440 Rosewood Drive Pleasanton, CA 94588-3050 (925) 965-4400 www.rossstores.com