Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Statements of Earnings

						Year Ended						Year Ended						Year Ended
($000, except per share data)						February 1, 2020						February 2, 2019						February 3, 2018
Sales						$	16,039,073					$	14,983,541					$	14,134,732
Costs and Expenses
Cost of goods sold						11,536,187						10,726,277						10,042,638
Selling, general and administrative						2,356,704						2,216,550						2,043,698
Interest (income) expense, net						(18,106)						(10,162)						7,676
Total costs and expenses						13,874,785						12,932,665						12,094,012
Earnings before taxes						2,164,288						2,050,876						2,040,720
Provision for taxes on earnings						503,360						463,419						677,967
Net earnings						$	1,660,928					$	1,587,457					$	1,362,753
Earnings per share
Basic						$	4.63					$	4.30					$	3.58
Diluted						$	4.60					$	4.26					$	3.55
Weighted-average shares outstanding (000)
Basic						358,462						369,533						381,174
Diluted						361,182						372,678						384,329
The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Comprehensive Income

						Year Ended						Year Ended						Year Ended
($000)						February 1, 2020						February 2, 2019						February 3, 2018
Net earnings						$	1,660,928					$	1,587,457					$	1,362,753
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments, net of tax						—						(27)						(64)
Comprehensive income						$	1,660,928					$	1,587,430					$	1,362,689
The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Balance Sheets

($000, except share data)			February 1, 2020						February 2, 2019
Assets
Current Assets
Cash and cash equivalents			$	1,351,205					$	1,412,912
Accounts receivable			102,236						96,711
Merchandise inventory			1,832,339						1,750,442
Prepaid expenses and other			147,048						143,954
Total current assets			3,432,828						3,404,019
Property and Equipment
Land and buildings			1,177,262						1,126,051
Fixtures and equipment			3,115,003						2,783,198
Leasehold improvements			1,219,736						1,175,921
Construction-in-progress			189,536						171,538
			5,701,537						5,256,708
Less accumulated depreciation and amortization			3,048,101						2,781,507
Property and equipment, net			2,653,436						2,475,201
Operating lease assets			3,053,782						—
Other long-term assets			208,321						194,471
Total assets			$	9,348,367					$	6,073,691
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable			$	1,296,482					$	1,177,104
Accrued expenses and other			462,111						431,596
Current operating lease liabilities			564,481						—
Accrued payroll and benefits			364,435						363,035
Income taxes payable			14,425						37,749
Total current liabilities			2,701,934						2,009,484
Long-term debt			312,891						312,440
Non-current operating lease liabilities			2,610,528						—
Other long-term liabilities			214,086						321,713
Deferred income taxes			149,679						124,308
Commitments and contingencies
Stockholders’ Equity
Common stock, par value $0.01 per share			3,568						3,682
Authorized 1,000,000,000 shares
Issued and outstanding 356,775,000 and
368,242,000 shares, respectively
Additional paid-in capital			1,458,307						1,375,965
Treasury stock			(433,328)						(372,663)
Retained earnings			2,330,702						2,298,762
Total stockholders’ equity			3,359,249						3,305,746
Total liabilities and stockholders’ equity			$	9,348,367					$	6,073,691
The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Stockholders’ Equity

																		Additional paid-in capital												Accumulated other comprehensive income (loss)
						Common stock																								Treasury stock												Retained earnings
(000)						Shares						Amount																														Total
Balance at January 28, 2017						391,893						$	3,919					$	1,215,715					$	(272,846)					$	91					$	1,801,138					$	2,748,017
Net earnings						—						—						—						—						—						1,362,753						1,362,753
Cumulative effect of adoption of
accounting standard
(stock-compensation), net						—						—						1,789						—						—						(1,113)						676
Unrealized investment loss, net						—						—						—						—						(64)						—						(64)
Common stock issued under stock
plans, net of shares
used for tax withholding						1,214						12						18,456						(45,433)						—						—						(26,965)
Stock-based compensation						—						—						87,417						—						—						—						87,417
Common stock repurchased						(13,489)						(135)						(31,013)						—						—						(843,852)						(875,000)
Dividends declared ($0.64 per share)						—						—						—						—						—						(247,526)						(247,526)
Balance at February 3, 2018						379,618						$	3,796					$	1,292,364					$	(318,279)					$	27					$	2,071,400					$	3,049,308
Net earnings						—						—						—						—						—						1,587,457						1,587,457
Cumulative effect of adoption of
accounting standard
(revenue recognition), net						—						—						—						—						—						19,884						19,884
Unrealized investment loss, net						—						—						—						—						(27)						—						(27)
Common stock issued under stock
plans, net of shares
used for tax withholding						1,097						11						20,101						(54,384)						—						—						(34,272)
Stock-based compensation						—						—						95,585						—						—						—						95,585
Common stock repurchased						(12,473)						(125)						(32,085)						—						—						(1,042,790)						(1,075,000)
Dividends declared ($0.90 per share)						—						—						—						—						—						(337,189)						(337,189)
Balance at February 2, 2019						368,242						$	3,682					$	1,375,965					$	(372,663)					$	—					$	2,298,762					$	3,305,746
Net earnings						—						—						—						—						—						1,660,928						1,660,928
Cumulative effect of adoption of
accounting standard (leases), net						—						—						—						—						—						(19,614)						(19,614)
Common stock issued under stock
plans, net of shares
used for tax withholding						793						8						22,201						(60,665)						—						—						(38,456)
Stock-based compensation						—						—						95,438						—						—						—						95,438
Common stock repurchased						(12,260)						(122)						(35,297)						—						—						(1,239,581)						(1,275,000)
Dividends declared ($1.02 per share)						—						—						—						—						—						(369,793)						(369,793)
Balance at February 1, 2020						356,775						$	3,568					$	1,458,307					$	(433,328)					$	—					$	2,330,702					$	3,359,249
The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Cash Flows

						Year Ended						Year Ended						Year Ended
($000)						February 1, 2020						February 2, 2019						February 3, 2018 1
Cash Flows From Operating Activities
Net earnings						$	1,660,928					$	1,587,457					$	1,362,753
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization						350,892						330,357						313,163
Stock-based compensation						95,438						95,585						87,417
Gain on sale of assets						—						—						(6,328)
Deferred income taxes						32,009						31,777						(34,903)
Change in assets and liabilities:
Merchandise inventory						(81,897)						(108,707)						(128,849)
Other current assets						(10,315)						(30,789)						(23,051)
Accounts payable						114,153						110,483						41,322
Other current liabilities						30,513						37,080						65,221
Income taxes						(35,239)						3,706						(1,740)
Operating lease assets and liabilities, net						15,631						—						—
Other long-term, net						(567)						9,728						6,333
Net cash provided by operating activities						2,171,546						2,066,677						1,681,338
Cash Flows From Investing Activities
Additions to property and equipment						(555,483)						(413,898)						(371,423)
Proceeds from sale of property and equipment						—						—						15,981
Proceeds from investments						517						3,489						687
Net cash used in investing activities						(554,966)						(410,409)						(354,755)
Cash Flows From Financing Activities
Payment of long-term debt						—						(85,000)						—
Issuance of common stock related to stock plans						22,209						20,112						18,468
Treasury stock purchased						(60,665)						(54,384)						(45,433)
Repurchase of common stock						(1,275,000)						(1,075,000)						(875,000)
Dividends paid						(369,793)						(337,189)						(247,526)
Net cash used in financing activities						(1,683,249)						(1,531,461)						(1,149,491)
Net (decrease) increase in cash, cash equivalents, and restricted cash and cash equivalents						(66,669)						124,807						177,092
Cash and cash equivalents, and restricted cash and cash equivalents:
Beginning of year 1						1,478,079						1,353,272						1,176,180
End of year						$	1,411,410					$	1,478,079					$	1,353,272
Supplemental Cash Flow Disclosures
Interest paid						$	12,682					$	18,105					$	18,105
Income taxes paid						$	506,591					$	427,930					$	714,566
1 As the result of the adoption of ASU 2016-18, Statement of Cash Flow (Topic 230): Restricted Cash, in fiscal 2018, the prior year amounts were retrospectively adjusted to include restricted cash and cash equivalents. See Note A.
The accompanying notes are an integral part of these consolidated financial statements.

Notes to Consolidated Financial Statements

Note A: Summary of Significant 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 2019, the Company operated 1,546 Ross Dress for Less® (“Ross”) locations in 39 states, the District of Columbia, and Guam, and 259 dd’s DISCOUNTS® stores in 19 states. The Ross and dd’s DISCOUNTS stores are supported by the Company’s headquarters, buying offices, and its network of distribution centers/warehouses.

Segment reporting. The Company has one reportable segment. The Company’s operations include only activities related to off-price retailing in stores throughout the United States.

Basis of presentation and fiscal year. The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. Intercompany transactions and accounts have been eliminated. The Company follows the National Retail Federation fiscal calendar and utilizes a 52-53 week fiscal year whereby the fiscal year ends on the Saturday nearest to January 31. The fiscal years ended February 1, 2020, February 2, 2019 and February 3, 2018 are referred to as fiscal 2019, fiscal 2018, and fiscal 2017, respectively. Fiscal 2017 was a 53-week year. Fiscal 2019 and 2018 were each 52-week years.

Use of accounting estimates. The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles in the United States of America (“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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant accounting estimates include valuation reserves for inventory shortage, packaway inventory costs, useful lives of fixed assets, insurance reserves, reserves for uncertain tax positions, and legal claims.

Purchase obligations. As of February 1, 2020, the Company had purchase obligations of approximately $2.7 billion. These 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.

Cash and cash equivalents. Cash equivalents consist of highly liquid, fixed income instruments purchased with an original maturity of three months or less.

Restricted cash, cash equivalents, and investments. Restricted cash, cash equivalents, and investments serve as collateral for certain insurance obligations of the Company. These restricted funds are invested in bank deposits, money market mutual funds, U.S. Government and agency securities, and corporate securities and cannot be withdrawn from the Company’s account without the prior written consent of the secured parties. The classification between current and long-term is based on the timing of expected payments of the insurance obligations.

The following table provides a reconciliation of cash, cash equivalents, restricted cash and cash equivalents in the Consolidated Balance Sheets that reconcile to the amounts shown on the Consolidated Statements of Cash Flows:

($000)						2019						2018						2017
Cash and cash equivalents						$	1,351,205					$	1,412,912					$	1,290,294
Restricted cash and cash equivalents included in:
Prepaid expenses and other						10,235						11,402						9,412
Other long-term assets						49,970						53,765						53,566
Total restricted cash and cash equivalents						60,205						65,167						62,978
Total cash, cash equivalents and restricted cash and equivalents						$	1,411,410					$	1,478,079					$	1,353,272

In addition to the restricted cash and cash equivalents in the table above, the Company had restricted investments of $0.4 million as of February 2, 2019 included in Prepaid expenses and other in the Consolidated Balance Sheets. The Company had no restricted investments as of February 1, 2020.

Estimated fair value of financial instruments. The carrying value of cash and cash equivalents, short- and long-term investments, restricted cash and cash equivalents, restricted investments, accounts receivable, other long-term assets, accounts payable, and other long-term liabilities approximates their estimated fair value. See Note B and Note D for additional fair value information.

Cash and cash equivalents were $1,351.2 million and $1,412.9 million, at February 1, 2020 and February 2, 2019, respectively, and include bank deposits and money market funds for which the fair value was determined using quoted prices for identical assets in active markets, which are considered to be Level 1 inputs under the fair value measurements and disclosures guidance.

Investments. The Company’s investments are comprised of various debt securities. At February 1, 2020 and February 2, 2019, these investments were classified as available-for-sale and are stated at fair value. Investments are classified as either short- or long-term based on their maturity dates and the Company’s intent. Investments with a maturity of less than one year are classified as short-term. See Note B for additional information.

Merchandise inventory. Merchandise inventory is stated at the lower of cost (determined using a weighted-average basis) or net realizable value. The Company purchases inventory that can either be shipped to stores or processed as packaway merchandise with the intent that it will be warehoused and released to stores at a later date. The timing of the release of packaway inventory to the stores is principally driven by the product mix and seasonality of the merchandise, and its relation to the Company’s store merchandise assortment plans. As such, the aging of packaway varies by merchandise category and seasonality of purchase, but typically packaway remains in storage less than six months. Merchandise inventory includes acquisition, processing, and storage costs related to packaway inventory. The cost of the Company’s merchandise inventory is reduced by valuation reserves for shortage based on historical shortage experience from the Company’s physical 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, and distribution facilities. Buying expenses include costs to procure merchandise inventories. Distribution expenses include the cost of operating the Company’s distribution centers, warehouses, and cross-dock facilities.

Property and equipment. Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful life of the asset, typically ranging from three to 12 years for equipment, 20 to 40 years for land improvements and buildings, and three to seven years for computer software costs incurred in developing or obtaining software for internal use. The cost of leasehold improvements is amortized over the useful life of the asset or the applicable lease term, whichever is less. Depreciation and amortization expense on property and equipment was $350.9 million, $330.4 million, and $313.2 million for fiscal 2019, 2018, and 2017, respectively. The Company capitalizes interest during the construction period of facilities and during the development and implementation phase of software projects. Interest capitalized was $4.4 million, $2.5 million, and $0.7 million in fiscal 2019, 2018, and 2017, respectively. As of February 1, 2020, February 2, 2019, and February 3, 2018 the Company had $40.3 million, $33.7 million, and $24.3 million, respectively, of property and equipment purchased but not yet paid. These purchases are included in Property and Equipment and in Accounts payable and Accrued expenses and other in the accompanying Consolidated Balance Sheets.

Other long-term assets. Other long-term assets as of February 1, 2020 and February 2, 2019 consisted of the following:

($000)						2019						2018
Deferred compensation (Note B)						$	141,443					$	124,558
Restricted cash and investments						49,970						53,765
Other						16,908						16,148
Total						$	208,321					$	194,471

Impairment of long-lived assets. Property and other long-term assets that are subject to depreciation and amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated undiscounted future cash flows. For stores that are closed, the Company records an impairment charge, if appropriate, or accelerates depreciation over the revised useful life of the asset. Intangible assets that are not subject to amortization, including goodwill, are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. Based on the Company’s evaluation during fiscal 2019, 2018, and 2017, no impairment charges were recorded.

Accounts payable. Accounts payable represents amounts owed to third parties at the end of the period. Accounts payable includes book cash overdrafts (checks issued under zero balance accounts not yet presented for payment) in excess of cash balances in such accounts of approximately $138.8 million and $83.2 million at February 1, 2020 and February 2, 2019, respectively. The Company includes the change in book cash overdrafts in operating cash flows.

Insurance obligations. The Company uses a combination of insurance and self-insurance for a number of risk management activities, including workers’ compensation, general liability, and employee-related health care benefits. The self-insurance and deductible liability is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. Self-insurance and deductible reserves as of February 1, 2020 and February 2, 2019 consisted of the following:

($000)						2019						2018
Workers’ compensation						$	87,063					$	89,993
General liability						44,371						42,877
Medical plans						6,430						6,515
Total						$	137,864					$	139,385

Workers’ compensation and self-insured medical plan liabilities are included in Accrued payroll and benefits and accruals for general liability are included in Accrued expenses and other in the accompanying Consolidated Balance Sheets.

Other long-term liabilities. Other long-term liabilities as of February 1, 2020 and February 2, 2019 consisted of the following:

($000)						2019						2018
Income taxes (Note F)						$	65,956					$	77,872
Deferred compensation (Note G)						141,443						124,558
Deferred rent						—			1			81,442
Tenant improvement allowances						—			1			25,418
Other						6,687						12,423
Total						$	214,086					$	321,713
1 Fiscal 2019 reflects the impact of adoption of ASU 2016-02, Leases (Accounting Standards Codification "ASC" 842) on a modified retrospective basis; fiscal 2018 was not restated.

Lease accounting. As the Company’s leases generally do not provide an implicit discount rate, the Company uses the estimated collateralized incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments for use in the calculation of the operating lease liabilities and right-of-use assets. This rate is determined using a portfolio approach based on the risk-adjusted rate of interest and requires estimates and assumptions including credit rating, credit spread, and adjustments for the impact of collateral. The Company believes that this is the rate it would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar lease term. Operating lease liabilities and corresponding right-of-use assets include options to extend lease terms that are reasonably certain of being exercised. The Company does not record a lease liability and corresponding right-of-use asset for leases with terms of 12 months or less, and accounts for lease and non-lease components as a single lease component. The Company's lease portfolio is comprised of operating leases with the lease cost recorded on a straight-line basis over the lease term.

Prior to the adoption of Accounting Standards Codification "ASC" 842 in the beginning of fiscal 2019, when a lease contained “rent holidays” or required fixed escalations of the minimum lease payments, the Company recorded rental expense on a straight-line basis over the term of the lease and the difference between the average rental amount was charged to expense and the amount payable under the lease was recorded as deferred rent. The Company began recording rent expense on the lease possession date. Tenant improvement allowances were amortized over the lease term. Changes in deferred rent and tenant improvement allowances were included as a component of operating activities in the Consolidated Statements of Cash Flows.

Revenue recognition. The Company recognizes revenue at the point of sale, net of sales taxes collected and an allowance for estimated future returns as required by ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606). The Company recognizes allowances for estimated sales returns on a gross basis as a reduction to sales. The asset recorded for the expected recovery of merchandise inventory was $10.7 million and $10.2 million and the liability recorded for the refund due to the customer was $20.9 million and $19.8 million as of February 1, 2020 and February 2, 2019, respectively. Prior to the adoption of ASC 606, the Company recognized allowances for sales returns on a net margin basis, which was $9.9 million as of February 3, 2018. Sales taxes collected that are outstanding and the allowance for estimated future returns are included in Accrued expenses and other and the asset for expected recovery of merchandise is included in Prepaid expenses and other in the Consolidated Balance Sheets.

Sales of stored value cards are deferred until they are redeemed for the purchase of Company merchandise. The Company’s stored value cards do not have expiration dates. Based upon historical redemption rates, a small percentage of stored value cards will never be redeemed, which represents breakage. As a result of adopting ASC 606, breakage is estimated and recognized as revenue based upon the historical pattern of customer redemptions. In prior periods, breakage was recorded as a reduction of operating expense when customer redemption was considered remote. Breakage was not material to the consolidated financial statements in fiscal 2019, 2018, and 2017.

The following sales mix table disaggregates revenue by merchandise category for fiscal 2019, 2018, and 2017:

						2019						2018						2017
Ladies						26		%				26		%				27		%
Home Accents and Bed and Bath						25		%				26		%				26		%
Men’s						14		%				14		%				13		%
Accessories, Lingerie, Fine Jewelry, and Fragrances						13		%				13		%				13		%
Shoes						13		%				13		%				13		%
Children’s						9		%				8		%				8		%
Total						100		%				100		%				100		%

Store pre-opening. Store pre-opening costs are expensed in the period incurred.

Advertising. Advertising costs are expensed in the period incurred and are included in Selling, general and administrative expenses. Advertising costs for fiscal 2019, 2018, and 2017 were $74.0 million, $79.9 million, and $76.4 million, respectively.

Stock-based compensation. The Company recognizes 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.

Taxes on earnings. The Company accounts for income taxes in accordance with ASC 740, “Accounting for Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than changes in the tax law or tax rates. ASC 740 clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s consolidated financial statements. ASC 740 prescribes a recognition threshold of more-likely-than-not, and a measurement standard for all tax positions taken or expected 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 restricted stock grants.

Earnings per share (“EPS”). The Company computes and reports both basic EPS and diluted EPS. Basic EPS is computed by dividing net earnings by the weighted-average number of common shares outstanding for the period. Diluted EPS is computed by dividing net earnings by the sum of the weighted-average number of common shares and dilutive common stock equivalents outstanding during the period. Diluted EPS reflects the total potential dilution that could occur from outstanding equity plan awards, including unexercised stock options and unvested shares of both performance and non-performance based awards of restricted stock.

In fiscal 2019, 2018, and 2017 there were 27,400, 23,700, and 2,800 weighted-average shares, respectively, that were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive for those years.

The following is a reconciliation of the number of shares (denominator) used in the basic and diluted EPS computations:

Shares in (000s)						Basic EPS						Effect of dilutive common stock equivalents						Diluted EPS
2019
Shares						358,462						2,720						361,182
Amount						$	4.63					$	(0.03)					$	4.60
2018
Shares						369,533						3,145						372,678
Amount						$	4.30					$	(0.04)					$	4.26
2017
Shares						381,174						3,155						384,329
Amount						$	3.58					$	(0.03)					$	3.55

Comprehensive income. Comprehensive income includes net earnings and components of other comprehensive income (loss), net of tax, consisting of unrealized investment gains or losses.

Recently issued accounting standards. The Company considers the applicability and impact of all Accounting Standards Updates (“ASU”) issued by the FASB. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company's consolidated financial results.

Recently adopted accounting standards. In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842), which along with subsequent amendments, supersedes the lease accounting requirements in ASC 840, Leases. The updated guidance requires balance sheet recognition for all leases with lease terms greater than one year including a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

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

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606) which, along with subsequent amendments, supersedes the revenue recognition requirements in “Revenue Recognition (ASC 605).” This guidance provides a five-step analysis of transactions to determine when and how revenue is recognized and requires entities to recognize revenue when the customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The Company adopted ASC 606 as of February 4, 2018, using the modified retrospective method. Results for reporting periods beginning on or after February 4, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with ASC 605. Upon adoption of ASC 606, the Company recorded a cumulative-effect adjustment to increase beginning retained earnings by $20 million as of February 4, 2018, primarily due to the change in the timing of the recognition of stored value card breakage. The impact of applying ASC 606 was not material to the Company's consolidated financial statements for the year ended February 2, 2019.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts on the statement of cash flows. The standard also requires companies who report cash and restricted cash separately on the balance sheet to reconcile those amounts to the statement of cash flows. The Company adopted ASU 2016-18 as of February 4, 2018, using the retrospective method.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 provides for changes to accounting for stock compensation including 1) excess tax benefits and tax deficiencies related to share-based payment awards will be recognized as income tax benefit or expense in the reporting period in which they occur (previously such amounts were recognized in additional paid-in capital); 2) excess tax benefits will be classified as an operating activity in the statement of cash flows; and 3) the option to elect to estimate forfeitures or account for them when they occur. The impact of recording excess tax benefits in income taxes in the Company's consolidated statement of earnings may be material, depending upon the Company's future stock price on vest date in relation to the fair value of awards on grant date and the future grants of stock-based compensation.

The Company adopted ASU 2016-09 in the first quarter of fiscal 2017, and elected to apply this adoption prospectively, except for forfeitures which it adopted on a modified retrospective basis. Accordingly, prior periods have not been adjusted. As a result of adoption, for the fiscal year ended February 3, 2018, the Company recognized $16.3 million of excess tax benefits related to stock-based payments as a reduction to its provision for income taxes. These items were historically recorded in additional paid-in capital. The Company also presented cash flows related to excess tax benefits as an operating activity in the Consolidated Statement of Cash Flows and elected to account for forfeitures as incurred beginning on January 29, 2017. The impact of this accounting policy

election for forfeitures was a cumulative-effect adjustment to decrease retained earnings by $1.1 million as of January 29, 2017.

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

Note B: Investments and Restricted Investments

Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The inputs used to measure fair value include: Level 1, observable inputs such as quoted prices in active markets; Level 2, inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, unobservable inputs in which little or no market data exists. This fair value hierarchy requires the Company to develop its own assumptions and maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Corporate, U.S. government and agency, and mortgage-backed securities are classified within Level 1 or Level 2 because these securities are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs.

There were no transfers between Level 1 and Level 2 categories during the fiscal year ended February 1, 2020. The fair value of the Company’s financial instruments as of February 1, 2020 and February 2, 2019 are as follows:

($000)												2019						2018
Cash and cash equivalents (Level 1)												$	1,351,205					$	1,412,912
Investments (Level 2)												$	8					$	125
Restricted cash and cash equivalents (Level 1)												$	60,205					$	65,167
Restricted investments (Level 2)												$	—					$	400

The underlying assets in the Company’s non-qualified deferred compensation program as of February 1, 2020 and February 2, 2019 (included in Other long-term assets and in Other long-term liabilities) primarily consist of participant-directed money market, stable value, stock, and bond funds. The fair value measurement for funds with quoted market prices in active markets (Level 1) and for funds without quoted market prices in active markets (Level 2) are as follows:

($000)			2019						2018
Level 1			$	134,440					$	114,181
Level 2			7,003						10,377
Total			$	141,443					$	124,558

Note C: Stock-Based Compensation

For fiscal 2019, 2018, and 2017, the Company recognized stock-based compensation expense as follows:

($000)			2019						2018						2017
Restricted stock			$	54,975					$	48,585					$	44,356
Performance awards			36,542						43,450						39,871
ESPP			3,921						3,550						3,190
Total			$	95,438					$	95,585					$	87,417

Capitalized stock-based compensation cost was not significant in any year.

At February 1, 2020, the Company had one active stock-based compensation plan, which is further described in Note H. The Company recognizes expense for ESPP 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 2019, 2018, and 2017 is as follows:

Statements of Earnings Classification ($000)			2019						2018						2017
Cost of goods sold			$	54,265					$	45,052					$	41,067
Selling, general and administrative			41,173						50,533						46,350
Total			$	95,438					$	95,585					$	87,417

The tax benefits related to stock-based compensation expense for fiscal 2019, 2018, and 2017 were $18.5 million, $19.6 million, and $29.5 million, respectively.

Note D: Debt

Senior notes. Unsecured senior debt, net of unamortized discounts and debt issuance costs, as of February 1, 2020 and February 2, 2019 consisted of the following:

($000)						2019						2018
6.53% Series B Senior Notes due 2021						$	64,963					$	64,942
3.375% Senior Notes due 2024						247,928						247,498
Total long-term debt						$	312,891					$	312,440

As of February 1, 2020, the Company had outstanding Series B unsecured Senior Notes in the aggregate principal amount of $65 million, held by various institutional investors. The Series B notes are due in December 2021 and bear interest at a rate of 6.53%. Borrowings under these Senior Notes are subject to certain financial covenants, including interest coverage and other financial ratios. As of February 1, 2020, the Company was in compliance with these covenants.

As of February 1, 2020, the Company also had outstanding unsecured 3.375% Senior Notes due September 2024 (the “2024 Notes”) with an aggregate principal amount of $250 million. Interest on the 2024 Notes is payable semi-annually.

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

As of February 1, 2020 and February 2, 2019, total unamortized discount and debt issuance costs were $2.1 million and $2.6 million, respectively, and were classified as a reduction of long-term debt.

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

The aggregate fair value of the two outstanding series of Senior Notes was approximately $335 million and $316 million as of February 1, 2020 and February 2, 2019, respectively. The fair value is estimated by obtaining comparable market quotes which are considered to be Level 1 inputs under the fair value measurements and disclosures guidance.

The following table shows scheduled annual principal payments on long-term debt:

($000)
2020									$	—
2021									$	65,000
2022									$	—
2023									$	—
2024									$	250,000
Thereafter									$	—

The table below shows the components of interest expense and income for fiscal 2019, 2018, and 2017:

($000)						2019						2018						2017
Interest expense on long-term debt						$	13,139					$	17,900					$	18,578
Other interest expense						968						1,004						979
Capitalized interest						(4,367)						(2,497)						(710)
Interest income						(27,846)						(26,569)						(11,171)
Interest (income) expense, net						$	(18,106)					$	(10,162)					$	7,676

Revolving credit facility. In July 2019, the Company entered into a new $800 million unsecured revolving credit facility, which replaced the Company's previous $600 million unsecured revolving credit facility. This new credit facility expires in July 2024, and contains a $300 million sublimit for issuance of standby letters of credit. The facility also contains an option allowing the Company to increase the size of its credit facility by up to an additional $300 million, with the agreement of the lenders. Interest on borrowings under this facility is based on LIBOR (or an alternate benchmark rate, if LIBOR is no longer available) plus an applicable margin (currently 75 basis points) and is payable quarterly and upon maturity. As of February 1, 2020, the Company had no borrowings or standby letters of credit outstanding under this facility and the $800 million credit facility remained in place and available.

Subsequent to year end, in March 2020, the Company borrowed $800 million from its revolving credit facility, which bears interest at LIBOR plus 0.75% (currently 1.61%), to add to its cash balances in order to provide enhanced financial flexibility due to uncertain market conditions arising from the impact of the COVID-19 pandemic.

The revolving credit facility is subject to a financial leverage ratio covenant. As of February 1, 2020, the Company was in compliance with this covenant.

Standby letters of credit and collateral trust. The Company uses standby letters of credit outside of its revolving credit facility in addition to a funded trust to collateralize its insurance obligations. As of February 1, 2020 and February 2, 2019, the Company had $4.2 million and $7.3 million, respectively, in standby letters of credit and $56.0 million and $58.3 million, respectively, in a collateral trust. The standby letters of credit are collateralized by restricted cash and the collateral trust consists of restricted cash, cash equivalents, and investments.

Trade letters of credit. The Company had $11.2 million and $13.3 million in trade letters of credit outstanding at February 1, 2020 and February 2, 2019, respectively.

Note E: Leases

The Company currently leases all but two of its store locations with original, non-cancelable terms that in general range from three to ten years. Store leases typically contain provisions for three to four renewal options of five years each. The exercise of lease renewal options is at the sole discretion of the Company. Most store leases also provide for minimum annual rentals and for payment of variable lease costs. In addition, some store leases also have provisions for additional rent based on a percentage of sales ("percentage rent") and others include rental payments adjusted periodically for inflation. The Company's lease agreements do not contain any material residual guarantees or material restrictive covenants. The Company does not have any financing leases.

In November 2017, the Company entered into a sale-leaseback transaction on one of its previously owned stores. The Company received net cash proceeds of $16.0 million, recognized a gain on sale of $6.3 million, and deferred the residual $7.5 million gain over the remaining ten-year lease term. As of February 3, 2019, the effective date of the adoption of ASC 842, the Company wrote-off the remaining $6.5 million deferred gain on the sale-leaseback transaction that met the sale definition under ASC 842 to beginning retained earnings.

The Company leases nine distribution centers/warehouses. All of these contain renewal provisions, except for the third-party warehouse in Fort Mill, South Carolina. The following table summarizes the location and expiration date of the Company's leased warehouses:

Location			Lease Expiration Date
Leased Distribution Centers/Warehouses
Moreno Valley, California1			2023
Moreno Valley, California1			2029
Shafter, California			2029
Shafter, California1			2020
Carlisle, Pennsylvania			2022
Carlisle, Pennsylvania			2021
Fort Mill, South Carolina			2024
Fort Mill, South Carolina1			2020
Rock Hill, South Carolina			2028
1 Operated by a third party.

The Company leases approximately 103,000 and 5,000 square feet of office space for its Los Angeles and Boston buying offices, respectively. The lease term for both of these facilities expire in 2022, and contain renewal provisions. In addition, the Company has a ground lease related to its New York buying office.

The following table presents net operating lease costs included in the Consolidated Statement of Earnings for fiscal 2019:

($000)			2019
Operating lease cost1			$	639,545
Variable lease costs2			174,438
Net lease cost3			$	813,983
1 Net of sublease income which was immaterial.
2 Includes property and rent taxes, insurance, common area maintenance, and percentage rent.
3 Excludes short-term lease costs which were immaterial.

The maturity of operating lease liabilities, including the ground lease related to the New York buying office as of February 1, 2020, are as follows:

($000)			Operating Leases1
2020			$	607,490
2021			633,846
2022			557,484
2023			469,211
2024			359,101
Thereafter			1,613,176
Total lease payments			$	4,240,308
Less: interest			1,065,299
Present value of lease liabilities			$	3,175,009
Less: current operating lease liabilities			564,481
Non-current operating lease liabilities			$	2,610,528
1 Operating leases exclude $266.8 million of minimum lease payments for leases signed that have not yet commenced.

At February 1, 2020, the weighted-average remaining lease term and the weighted-average discount rate for operating leases is 10.7 years and 3.5%, respectively. The weighted-average remaining lease term and the weighted-average discount rate, excluding the long-term ground lease related to the New York buying office, were 6.1 years and 3.1%, respectively.

Cash paid for amounts included in the measurement of operating lease liabilities was $608.6 million for fiscal 2019 and is included in Net cash provided by operating activities in the Consolidated Statements of Cash Flows.

Operating lease assets obtained in exchange for new operating lease liabilities (includes new leases and remeasurements or modifications of existing leases) during fiscal 2019 was $739.3 million.

In accordance with ASC 840, the aggregate undiscounted future minimum annual lease payments under leases, including the ground lease related to the New York buying office, in effect at February 2, 2019 are as follows:

($000)						Total operating leases
2020						$	555,812
2021						580,712
2022						499,678
2023						424,695
2024						339,340
Thereafter						1,575,673
Total minimum lease payments						$	3,975,910

Rent expense under ASC 840, including contingent rent and net of sublease income, was $569.8 million and $532.4 million in fiscal 2018 and 2017, respectively. Contingent rent and sublease income was not significant in any year.

Note F: Taxes on Earnings

The provision for income taxes consisted of the following:

($000)						2019						2018						2017
Current
Federal						$	414,823					$	357,170					$	660,017
State						56,528						74,472						52,853
						471,351						431,642						712,870
Deferred
Federal						28,244						33,913						(40,468)
State						3,765						(2,136)						5,565
						32,009						31,777						(34,903)
Total						$	503,360					$	463,419					$	677,967

The provision for taxes for financial reporting purposes is different from the tax provision computed by applying the statutory federal income tax rate. The differences are reconciled below:

						2019						2018						2017
Federal income taxes at the statutory rate						21		%				21		%				34		%
State income taxes (net of federal benefit) and other, net						2						3						2
Tax audit settlements						—						(1)						—
Impact of the Tax Act on deferred taxes						—						—						(3)
Total						23		%				23		%				33		%

In November 2019, the Company resolved uncertain tax positions with a state tax authority. As a result, the Company recognized a tax benefit of approximately $10.0 million in the Consolidated Statement of Earnings. In fiscal 2018, the Company resolved uncertain tax positions related to fiscal 2015 with the Internal Revenue Service. As a result, the Company recognized a tax benefit of approximately $26.0 million in the Consolidated Statement of Earnings.

In fiscal 2017, The Tax Cuts and Jobs Act (the “Tax Act” or "tax reform") was signed into law. The Tax Act made significant changes to U.S. corporate taxation including reducing the U.S. federal corporate income tax rate from 35% to 21% effective January 1, 2018, the last month of fiscal 2017. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. The Company applied a blended U.S. federal income tax rate of approximately 34% for fiscal 2017. This reduced tax rate resulted in a tax benefit of $24.9 million in fiscal 2017. The Company recorded an additional tax benefit of $55.2 million due to the remeasurement of its deferred tax assets and liabilities in fiscal 2017.

Also, in fiscal 2017, the Company adopted ASU 2016-09. Prior to adoption of ASU 2016-09, the Company recorded tax benefits related to employee equity programs in additional paid-in capital. As a result of adopting ASU 2016-09, the Company recorded tax benefits of $13.3 million, $12.6 million and $16.3 million in 2019, 2018 and 2017, respectively, as a reduction to its provision for income taxes.

The components of deferred taxes at February 1, 2020 and February 2, 2019 are as follows:

($000)						2019						2018
Deferred Tax Assets
Accrued liabilities						$	35,242					$	38,367
Deferred compensation						33,108						30,886
Stock-based compensation						35,290						36,118
Deferred rent						—						19,824
State taxes and credits						20,178						20,310
Employee benefits						18,425						18,845
Operating lease liabilities						797,467			1			—
Other						3,353						1,412
Gross Deferred Tax Assets						943,063						165,762
Less: Valuation allowance						(4,590)						(4,639)
Deferred Tax Assets						938,473						161,123
Deferred Tax Liabilities
Depreciation						(273,255)						(238,631)
Merchandise inventory						(26,376)						(25,686)
Supplies						(10,972)						(10,308)
Operating lease assets						(766,874)			1			—
Other						(10,675)						(10,806)
Deferred Tax Liabilities						(1,088,152)						(285,431)
Net Deferred Tax Liabilities						$	(149,679)					$	(124,308)
1 Fiscal 2019 reflects the impact of adoption of ASU 2016-02, Leases (ASC 842) on a modified retrospective basis; fiscal 2018 was not restated.

At the end of fiscal 2019 and 2018, the Company’s state tax credit carryforwards for income tax purposes were approximately $12.8 million and $13.6 million, respectively. The state tax credit carryforwards will begin to expire in fiscal 2020. The Company has provided a valuation allowance of $4.6 million as of the end of fiscal 2019 for deferred tax assets related to state tax credits that are not expected to be realized.

The changes in amounts of unrecognized tax benefits (gross of federal tax benefits and excluding interest and penalties) at fiscal 2019, 2018, and 2017 are as follows:

($000)						2019						2018						2017
Unrecognized tax benefits - beginning of year						$	65,787					$	98,666					$	81,122
Gross increases:
Tax positions in current period						13,864						14,722						26,837
Tax positions in prior period						2,672						1,843						—
Gross decreases:
Tax positions in prior periods						(9,559)						(40,600)						(2,755)
Lapse of statutes of limitations						(8,653)						(8,584)						(6,068)
Settlements						(4,224)						(260)						(470)
Unrecognized tax benefits - end of year						$	59,887					$	65,787					$	98,666

At the end of fiscal 2019, 2018, and 2017, the reserves for unrecognized tax benefits were $67.1 million, $78.8 million, and $121.3 million inclusive of $7.2 million, $13.0 million, and $22.6 million of related reserves for interest and penalties, respectively. In November 2019, the Company resolved uncertain tax positions with a state tax authority. As a result, the Company recognized a decrease in reserves for tax positions in prior periods of $16.2

million, inclusive of $6.6 million of related reserves for interest and penalties. In fiscal 2018, the Company resolved uncertain tax positions related to fiscal 2015 with the Internal Revenue Service. As a result, the Company recognized a decrease in reserves for tax positions in prior periods of $52.4 million, inclusive of $12.6 million of related reserves for interest and penalties. The Company accounts for interest and penalties related to unrecognized tax benefits as a part of its provision for taxes on earnings. If recognized, $53.3 million would impact the Company’s effective tax rate. The difference between the total amount of unrecognized tax benefits and the amounts that would impact the effective tax rate relates to amounts attributable to deferred tax assets and liabilities. These amounts are net of federal and state income taxes.

It is reasonably possible that certain state tax matters may be concluded or statutes of limitations may lapse during the next twelve months. Accordingly, the total amount of unrecognized tax benefits may decrease by up to $10.3 million.

The Company is open to audit by the Internal Revenue Service under the statute of limitations for fiscal years 2016 through 2019. The Company’s state income tax returns are generally open to audit under the various statutes of limitations for fiscal years 2015 through 2019. Certain 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 consolidated financial statements.

Note G: Employee Benefit Plans

The Company has a defined contribution plan that is available to certain employees. Under the plan, employee and Company contributions and accumulated plan earnings qualify for favorable tax treatment under Section 401(k) of the Internal Revenue Code. This plan permits employees to make contributions up to the maximum limits allowable under the Internal Revenue Code. The Company matches up to 4% of the employee’s salary up to the plan limits. Company matching contributions to the 401(k) plan were $19.2 million, $17.1 million, and $15.4 million in fiscal 2019, 2018, and 2017, respectively.

The Company also has an Incentive Compensation Plan which provides cash awards to key management and employees based on Company and individual performance.

The Company also makes available to management a Non-qualified Deferred Compensation Plan which allows management to make payroll contributions on a pre-tax basis in addition to the 401(k) plan. Other long-term assets include $141.4 million and $124.6 million at February 1, 2020 and February 2, 2019, respectively, of long-term plan investments, at market value, set aside or designated for the Non-qualified Deferred Compensation Plan (See Note B). Plan investments are designated by the participants, and investment returns are not guaranteed by the Company. The Company has a corresponding liability to participants of $141.4 million and $124.6 million at February 1, 2020 and February 2, 2019, respectively, included in Other long-term liabilities in the Consolidated Balance Sheets.

In addition, the Company has certain individuals who receive or will receive post-employment medical benefits. The estimated liability for these benefits of $8.2 million and $6.7 million is included in Accrued expenses and other in the accompanying Consolidated Balance Sheets as of February 1, 2020 and February 2, 2019, respectively.

Note H: Stockholders’ Equity

Common stock. In March 2019, the Company's Board of Directors approved a two-year $2.55 billion stock repurchase program through fiscal 2020. As of the end of fiscal 2019, the Company has $1.275 billion remaining under the stock repurchase program. Due to the current economic uncertainty stemming from the severe impact of the COVID-19 pandemic, the Company is temporarily suspending its stock repurchase program. In February 2017, the Company’s Board of Directors approved a two-year $1.75 billion stock repurchase program through fiscal 2018. In March 2018, the Company’s Board of Directors approved an increase in the stock repurchase authorization for fiscal 2018 by $200 million to $1.075 billion, up from the previously available $875 million.

The following table summarizes the Company’s stock repurchase activity in fiscal 2019, 2018, and 2017:

Fiscal Year						Shares repurchased (in millions)						Average repurchase price						Repurchased (in millions)
2019						12.3						$103.99						$1,275
2018						12.5						$86.19						$1,075
2017						13.5						$64.87						$875

Preferred stock. The Company has 4.0 million shares of preferred stock authorized, with a par value of $.01 per share. No preferred stock is issued or outstanding.

Dividends. On March 3, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.285 per common share, payable on March 31, 2020. The Company’s Board of Directors declared cash dividends of $0.255 per common share in March, May, August, and November 2019, cash dividends of $0.225 per common share in March, May, August, and November 2018, and cash dividends of $0.160 per common share in February, May, August, and November 2017.

2017 Equity Incentive Plan. On May 17, 2017, the Company’s stockholders approved the Ross Stores, Inc. 2017 Equity Incentive Plan (the “2017 Plan”) which replaced the Company’s 2008 Equity Incentive Plan (“Predecessor Plan”). The 2017 Plan, which was authorized to issue a maximum of 12.0 million shares, was immediately effective upon approval and no further awards were granted under the Predecessor Plan, which was terminated.

The 2017 Plan has an initial share reserve of 12.0 million shares of the Company’s common stock which can be increased by a maximum of 5.5 million shares from certain expired, withheld, or forfeited shares from the 2017 Plan or the Predecessor Plan. The 2017 Plan provides for various types of incentive awards, which may potentially include the grant of stock options, stock appreciation rights, restricted stock purchase rights, restricted stock bonuses, restricted stock units, performance shares, performance units, and deferred compensation awards. As of February 1, 2020, there were 10.7 million shares available for grant under the 2017 Plan.

A summary of restricted stock and performance share award activity for fiscal 2019 is presented below:

						Number of shares (000)						Weighted-average grant date fair value
Unvested at February 2, 2019						5,130						$62.50
Awarded						1,422						95.25
Released						(1,782)						53.14
Forfeited						(376)						70.90
Unvested at February 1, 2020						4,394						$76.20

The market value of shares of restricted stock and performance shares at the date of grant is amortized to expense over the vesting period of generally three to five years. The unamortized compensation expense at February 1, 2020 and February 2, 2019 was $158.4 million and $138.1 million, respectively, which is expected to be recognized over a weighted-average remaining period of 2.0 years. Intrinsic value for restricted stock, defined as the closing market value on the last business day of fiscal year 2019 (or $112.19), was $493.0 million. A total of 10.7 million, 11.2 million, and 11.9 million shares were available for new restricted stock awards at the end of fiscal 2019, 2018,

and 2017, respectively. During fiscal 2019, 2018, and 2017, shares purchased by the Company for tax withholding totaled 0.6 million, 0.7 million, and 0.7 million shares, respectively, and are considered treasury shares which are available for reissuance. As of February 1, 2020 and February 2, 2019, the Company held 13.8 million and 13.2 million shares of treasury stock, respectively.

Performance share awards. The Company has a performance share award program for senior executives. A performance share award represents a right to receive shares of restricted stock on a specified settlement date based on the Company’s attainment of a profitability-based performance goal during the performance period, which is the Company’s fiscal year. If attained, the restricted stock then vests over a service period, generally two to three years from the date the performance award was granted. The Company issued approximately 414,000, 556,000, and 655,000 shares in settlement of the fiscal 2019, 2018, and 2017 awards.

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.

During fiscal 2019, 2018, and 2017, employees purchased approximately 0.3 million, 0.3 million, and 0.3 million shares, respectively, of the Company’s common stock under the plan at weighted-average per share prices of $88.45, $72.89, and $56.42, respectively. Through February 1, 2020, approximately 40.2 million shares had been issued under this plan and 4.8 million shares remained available for future issuance.

Note I: Related Party Transactions

The Company has a consulting agreement with Norman Ferber, its Chairman Emeritus of the Board of Directors, under which the Company paid him $2.1 million, $1.9 million, and $1.6 million in fiscal 2019, 2018, and 2017, respectively. In addition, the agreement provides for administrative support and health and other benefits for him and his dependents, which totaled approximately $0.4 million, $0.4 million, and $0.4 million in fiscal 2019, 2018, and 2017, respectively, along with amounts to cover premiums through May 2021 on a life insurance policy with a death benefit of $2.0 million. Mr. Ferber's current consulting agreement pays him an annual consulting fee of $2.3 million through May 2021. On termination of Mr. Ferber’s consultancy with the Company, the Company will pay Mr. Ferber $75,000 per year for a period of 10 years.

Robert Ferber, the son of Norman Ferber, is a buyer with the Company. The Company paid Robert Ferber compensation including salary and bonus of approximately $209,000, $180,000, and $159,000 in fiscal 2019, 2018, and 2017, respectively.

Note J: Litigation, Claims, and Assessments

Like many retailers, the Company has been named in class/representative action lawsuits, primarily in California, alleging violation of wage and hour laws and consumer protection laws. Class/representative action litigation remains pending as of February 1, 2020.

The Company is also party to various other legal and regulatory proceedings arising in the normal course of business. Actions filed against the Company may include commercial, product and product safety, consumer, intellectual property, environmental, and labor and employment-related claims, including lawsuits in which private plaintiffs or governmental agencies allege that the Company violated federal, state, and/or local laws. Actions against the Company are in various procedural stages. Many of these proceedings raise factual and legal issues and are subject to uncertainties.

In the opinion of management, the resolution of pending class/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.

Note K: Quarterly Financial Data (Unaudited)

Summarized quarterly financial information for fiscal 2019 and 2018 is presented in the tables below.

Year ended February 1, 2020:

						Quarter Ended
($000, except per share data)						May 4, 2019						August 3, 2019						November 2, 2019						February 1, 2020
Sales						$	3,796,642					$	3,979,869					$	3,849,117					$	4,413,445
Cost of goods sold						2,701,668						2,843,850						2,766,432						3,224,237
Selling, general and administrative						558,250						591,970						604,605						601,879
Interest income, net						(5,635)						(4,782)						(4,402)						(3,287)
Total costs and expenses						3,254,283						3,431,038						3,366,635						3,822,829
Earnings before taxes						542,359						548,831						482,482						590,616
Provision for taxes on earnings						121,217						136,110						111,550						134,483
Net earnings						$	421,142					$	412,721					$	370,932					$	456,133
Earnings per share – basic1						$	1.16					$	1.15					$	1.04					$	1.29		²
Earnings per share – diluted1						$	1.15					$	1.14					$	1.03					$	1.28		²
Cash dividends declared per share
on common stock						$	0.255					$	0.255					$	0.255					$	0.255

¹			EPS is computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of changes in average quarterly shares outstanding.
²			Includes a per share benefit of approximately $0.02 primarily related to the favorable resolution of a tax matter.

Year ended February 2, 2019:

						Quarter Ended
($000, except per share data)						May 5, 2018						August 4, 2018						November 3, 2018						February 2, 2019
Sales						$	3,588,619					$	3,737,926					$	3,549,608					$	4,107,388
Cost of goods sold						2,522,219						2,666,983						2,547,331						2,989,744
Selling, general and administrative						524,423						554,581						561,577						575,969
Interest income, net						(503)						(1,393)						(2,953)						(5,313)
Total costs and expenses						3,046,139						3,220,171						3,105,955						3,560,400
Earnings before taxes						542,480						517,755						443,653						546,988
Provision for taxes on earnings						124,228						128,351						105,545						105,295
Net earnings						$	418,252					$	389,404					$	338,108					$	441,693
Earnings per share – basic1						$	1.12					$	1.05					$	0.92					$	1.21		²
Earnings per share – diluted1						$	1.11					$	1.04					$	0.91					$	1.20		²
Cash dividends declared per share
on common stock						$	0.225					$	0.225					$	0.225					$	0.225

¹			EPS is computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of changes in average quarterly shares outstanding.
²			Includes a per share benefit of approximately $0.07 from the favorable resolution of a tax matter.

Note L: Subsequent Events

The United States and other countries are experiencing a major global health pandemic related to the outbreak of a novel strain of coronavirus, COVID-19. Governmental authorities in affected regions are taking increasingly dramatic action in an effort to slow down the spread of the disease. As part of a growing number of retailers across the country, the Company has temporarily closed all store locations effective March 20, 2020 through April 3, 2020. The Company has closed its buying and corporate offices, and its distribution centers, for the same period. The Company is monitoring the situation and will reopen stores as conditions permit; however, extended or further closures may be required nationally, regionally, or in specific locations. Given the unprecedented uncertainty of this situation, including the unknown duration and severity of the pandemic and the unknown overall impact on consumer demand, the Company is unable to forecast the full impact on its business; however, the Company now expects that impacts from the COVID-19 pandemic and the related economic disruption will have a material adverse impact on its consolidated results of operations, consolidated financial position, and consolidated cash flows in fiscal 2020.

Due to the current economic uncertainty stemming from the severe impact of the COVID-19 pandemic, and to provide enhanced financial flexibility, the Company borrowed $800 million from its revolving credit facility in March 2020, which bears interest at LIBOR plus 0.75% (currently 1.61%), and is temporarily suspending its stock repurchase program.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Ross Stores, Inc.:

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Ross Stores, Inc. and subsidiaries (the "Company") as of February 1, 2020 and February 2, 2019, and the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the fiscal years ended February 1, 2020, February 2, 2019, and February 3, 2018 and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of February 1, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 1, 2020 and February 2, 2019, and the results of its operations and its cash flows for each of the fiscal years ended February 1, 2020, February 2, 2019, and February 3, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 1, 2020, based on the criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note A to the financial statements, effective February 3, 2019, the Company adopted FASB ASC 842, Leases, using the modified retrospective basis. Recently adopted accounting standards – ASC 842, Leases, is also communicated as a critical audit matter below.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Recently adopted accounting standards – ASC 842, Leases – Incremental Borrowing Rate — Refer to Note A and Note E to the consolidated financial statements (also see Change in Accounting Principle explanatory paragraph above)

Critical Audit Matter Description

The Company adopted the provisions of ASC 842, Leases ("ASC 842"), as of February 3, 2019. The Company recorded lease liabilities for the present value of its lease commitments and corresponding right-of-use (ROU) assets of approximately $2.9 billion, upon adoption. The Company developed estimated collateralized incremental borrowing rates (IBR) for each lease portfolio to present value the lease payments as required by ASC 842 when the discount rate is not implicit in the lease. The determination of an IBR required management to use significant estimates and assumptions including its credit rating, credit spread, and adjustments for the impact of collateral.

We identified the IBRs used in the adoption of ASC 842 as a critical audit matter because of the significant impact of management’s assumptions and estimates in determining the selected IBRs for each lease portfolio and the related material impact upon the lease liabilities and corresponding right-of-use (ROU) assets recorded upon adoption.

Management’s assumptions and estimates used in determining the selected IBRs were the Company’s credit rating, credit spread, and adjustments for the impact of collateral. Given these significant judgments made by management in determining the IBR, performing audit procedures to evaluate the reasonableness of the methods and assumptions related to these assumptions and estimates involved a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the IBRs used in the adoption of ASC 842 included the following, among others:

• We tested the effectiveness of controls over the methods and assumptions used by management to estimate the IBRs, including those over the credit rating, credit spreads and adjustments for the impact of collateral.

• With the assistance of our fair value specialists, we evaluated the methods and assumptions used by management to estimate the IBRs and tested the inputs used by management to develop the IBRs as follows:

- Assessed the reasonableness of the methodology and models used to estimate the IBRs based on

the definition and guidance in ASC 842 and other reference materials.

- Assessed the reasonableness of the significant inputs used to estimate the IBRs by comparing to

Company specific benchmarks, comparable companies and other market information:

◦The credit rating ascribed to the Company.

◦The credit spreads applied in determining the IBRs.

◦The collateral adjustment applied in determining the IBRs.

*/s/*DELOITTE & TOUCHE LLP

San Francisco, California

March 31, 2020

We have served as the Company’s auditor since 1982.