ROST

Ross Stores, Inc. 10-K Summary: Fiscal Year Ended January 31, 2004

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended January 31, 2004. Ross Stores, Inc. operates as the second-largest off-price apparel and home accessories retailer in the United States. The company targets value-conscious consumers, offering brand-name merchandise at discounts of 20% to 60% below regular department store prices. As of the reporting date, the company operated 568 stores across 25 states and Guam. The company also announced a new off-price concept, "dd's DISCOUNTS," targeting lower-income households, with plans to open 10 initial locations in late 2004.

Key Financial Metrics

Material Changes vs. Prior Period

• Sales Growth: Total sales increased 11% to $3.92 billion, driven by the opening of 61 net new stores (66 opened, 5 closed). Comparable store sales growth slowed significantly to 1% compared to 7% in the prior year.
• Profitability: Net earnings rose 13% to $228.1 million. Net earnings margin improved slightly to 5.8% from 5.7%, primarily due to a reduction in Selling, General, and Administrative (SG&A) expenses as a percentage of sales (16.0% vs. 16.2%).
• Cost Structure: Cost of goods sold remained flat at 74.4% of sales. Distribution costs decreased, but this was offset by a 25 basis point increase in store occupancy costs due to reduced leverage from slower comparable sales growth.
• Capital Allocation: The company repurchased $150 million of common stock (6.9 million shares) and paid quarterly dividends totaling $0.129 per share. A two-for-one stock split was effected in December 2003.
• Debt: Long-term debt doubled to $50 million following the full drawdown of a term loan to finance the new Southern California distribution center.

Guidance, Outlook, and Risks

• Expansion Goals: Management plans to grow to over 1,000 stores by fiscal 2008 and generate over $7 billion in annual revenue. Capital expenditures for fiscal 2004 are forecast at approximately $135 million to fund 70 net new Ross stores and 10 dd's DISCOUNTS stores.
• Real Estate Transition: The company transitioned West Coast distribution operations to a new facility in Perris, California. The former Newark, California headquarters and distribution center (net book value ~$35 million) is being evaluated for sale or alternative use. Management noted a potential significant write-down may be required if the facility is sold in the depressed Bay Area market.
• Off-Balance Sheet Obligations: The company utilizes synthetic leases for two major distribution centers (South Carolina and Southern California) with total residual value guarantees of approximately $130 million. These are not consolidated but carry covenant restrictions.
• Risks: Key risks include the ability to secure attractive merchandise at deep discounts, intense competition, the success of the new dd's DISCOUNTS concept, and potential impairment charges related to the Newark facility. The company also faces exposure to California-specific economic downturns or natural disasters, as 32% of stores and corporate headquarters are located there.

Investor Verification Checklist

• Newark Facility Valuation: Verify the outcome of the third-party valuation for the Newark, CA facility and the likelihood of a material impairment charge in the next fiscal year.
• Comparable Store Sales Trend: Monitor if the 1% comparable store sales growth is a temporary anomaly or a structural shift in consumer demand for off-price retail.
• dd's DISCOUNTS Execution: Track the performance and opening timeline of the new "dd's DISCOUNTS" concept stores scheduled for late 2004.
• Synthetic Lease Covenants: Review compliance with interest coverage and leverage ratios associated with the $157 million in synthetic lease facilities.
• Inventory Levels: Assess the "packaway" inventory strategy, which comprised 43% of total inventory, to ensure it does not lead to future markdowns or obsolescence.