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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark one)

For the fiscal year ended February 2, 2002

OR

For the transition period from                                      to                                     

Commission file number 0-14678

ROSS STORES, INC.
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code (510) 505-4400

        Securities registered pursuant to Section 12(b) of the Act: None

        Securities registered pursuant to Section 12(g) of the Act:

        Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

        The aggregate market value of the voting common stock held by non-affiliates of the Registrant as of March 29, 2002 was $2,899,768,652. Shares of voting stock held by each director and executive officer have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        The number of shares of Common Stock, with $.01 par value, outstanding on March 29, 2002 was 79,102,570.

        Documents incorporated by reference:

Portions of the Proxy Statement for Registrant's 2002 Annual Meeting of Stockholders, which will be filed on or before June 2, 2002, are incorporated herein by reference into Part III.

PART I

ITEM 1.    BUSINESS

        Ross Stores, Inc. ("Ross" or "the company") operates a chain of off-price retail apparel and home accessories stores, which target value conscious men and women between the ages of 25 and 54 primarily in middle-income households. The decisions of the company, from merchandising, purchasing and pricing, to the location of its stores, are aimed at this customer base. The company offers brand name and designer merchandise at low everyday prices, generally 20% to 60% below regular prices of most department and specialty stores. The company believes it derives a competitive advantage by offering a wide assortment of quality brand-name merchandise within each of its merchandise categories in an attractive easy-to-shop environment.

        Ross' mission is to offer competitive values to its target customer by focusing on the following key strategic objectives:

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Achieve an appropriate level of recognizable brands and labels at strong discounts throughout the store;



•

Meet customer needs on a more regional basis;



•

Deliver an in-store shopping experience that reflects the expectations of the off-price customer; and



•

Manage real estate growth to maintain leadership or achieve parity with the competition in key markets.

        The original Ross Stores, Inc. was incorporated in California in 1957. In August 1982, the company was purchased by some of its then current directors and stockholders. The six stores acquired were completely refurbished in the company's off-price format and stocked with new merchandise. In June 1989 the company reincorporated in the state of Delaware.

Merchandising, Purchasing and Pricing

        Ross seeks to provide its customers with a wide assortment of first quality, in-season, name-brand apparel, accessories and footwear for the entire family at everyday savings of 20% to 60% from regular department and specialty store prices, as well as similar savings on fragrances, gift items for the home, bed and bath merchandise and accessories. Although not a fashion leader, the company sells recognizable branded merchandise that is current and fashionable in each category. New merchandise typically is received five times each week at the company's 452 stores. The company's buyers review their merchandise assortments on a weekly basis, enabling them to respond to merchandise trends and purchasing opportunities in the market. The company's merchandising strategy is reflected in its advertising, which emphasizes a strong value message—Ross' customers will find great savings everyday on a broad assortment of name-brand merchandise.

        Merchandising.    The Ross merchandising strategy incorporates a combination of off-price buying techniques to purchase both in-season and past-season merchandise. The company's emphasis on nationally recognized name brands reflects management's conviction that brand-name merchandise sold at compelling discounts will continue to be an important determinant of its success. Ross generally leaves the brand-name label on the merchandise it sells.

        The company has established a merchandise assortment that it believes is attractive to its target customer group. Although Ross offers fewer classifications of merchandise than most department stores, the company generally offers a large selection of brand names within each classification with a wide assortment of vendors, prices, colors, styles and fabrics within each size or item. Over the past several years, the company has diversified its merchandise offerings by adding new product categories

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such as maternity, small furnishings, educational toys and games, luggage, gourmet food and cookware, and fine jewelry in select stores. The respective departments accounted for total sales in fiscal 2001 approximately as follows: Ladies 34%, Men's 19%, Home Accents and Bed and Bath 18%, Fine Jewelry, Accessories, Hosiery, Lingerie and Fragrances 12%, Children's 10% and Shoes 7%.

        Purchasing.    The company continues to expand its network of vendors and manufacturers and believes it has adequate sources of first quality merchandise to meet its requirements. The company purchases the vast majority of its merchandise directly from manufacturers and has not experienced any difficulty in obtaining sufficient inventory.

        The company believes that its ability to effectively execute certain off-price buying strategies is a key factor in its success. Ross buyers use a number of methods that enable the company to offer its customers name-brand merchandise at strong everyday discounts relative to department and specialty stores. By purchasing later in the merchandise buying cycle than department and specialty stores, Ross is able to take advantage of imbalances in manufacturer-projected supplies of merchandise.

        Unlike most department and specialty stores, Ross does not require that manufacturers provide promotional and markdown allowances, return privileges, split shipments, drop shipments to stores or delayed deliveries of merchandise. For most orders, only one delivery is made to one of the company's two distribution centers or a third party processing facility located in the southeast. These flexible requirements further enable the company's buyers to obtain significant discounts on in-season purchases.

        The company has increased its emphasis in recent years on opportunistic purchases created by manufacturer overruns and canceled orders both during and at the end of a season. These buys are referred to as "closeout" or "packaway" purchases. Closeouts can be shipped to stores in season. Closeouts allow the company to get in season goods in its stores at lower prices. Packaway merchandise is purchased with the intent that it will be stored in the company's warehouses until a later date, which may even be the beginning of the next selling season. Packaway purchases are an effective method of increasing the percentage of prestige and national brands at competitive savings within the merchandise assortments. Packaway merchandise is mainly fashion basics and, therefore, not usually affected by shifts in fashion trends.

        Throughout the past decade, Ross gradually increased the amount of packaway inventories. In 2001, the company continued its emphasis on these important resources in response to compelling opportunities available in the marketplace. Packaway accounted for approximately 43% of total inventories as of February 2, 2002, compared to 45% at the end of the prior year. It is management's belief that the stronger discounts the company is able to offer on packaway merchandise are a key driver of Ross' business. In-store inventories at the end of fiscal 2001 were up about 1% from the prior year, and total consolidated inventories were up 11% mainly due to a greater number of stores in operation compared to the prior year.

        The company has been developing and implementing enhanced systems and processes for regionalized merchandise buying and allocation. The goal is to fine tune the merchandise mix and raise gross profit margins and sales productivity, especially in markets that are performing below the company average. These systems also provide the company with the tools to maximize new store productivity in new markets. At the end of 2001, approximately 85% to 90% of all merchandise departments were planned utilizing these new systems. Full rollout of the systems to all merchandise departments is scheduled to be complete by early 2002.

        Ross' buying offices are located in New York City and Los Angeles, the nation's two largest apparel markets. These strategic locations allow buyers to be in the market on a daily basis, sourcing opportunities and negotiating purchases with vendors and manufacturers. These locations also enable

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the company's buyers to strengthen vendor relationships—a key determinant in the success of its off-price buying strategies.

        The company's buyers have an average of 15 years of experience, including merchandising positions with other retailers such as Bloomingdale's, Burlington Coat Factory, Dayton Hudson, Foot Locker, Lechters, Lord & Taylor, Macy's, Marshalls, Nordstrom, Robinsons/May, Sterns, T.J. Maxx and Value City. In keeping with its strategy, over the past decade the company's merchandising staff has grown almost four-fold. Management believes that this increase enables its merchants to spend even more time in the market which, in turn, should strengthen the company's ability to procure the most desirable brands at competitive discounts.

        This combination of off-price buying strategies enables the company to purchase merchandise at net prices that are lower than prices paid by department and specialty stores.

        Pricing.    The company's policy is to sell brand-name merchandise that can generally be priced at 20% to 60% less than most department and specialty store regular prices. The Ross pricing policy is to affix a ticket displaying the company's selling price as well as the estimated comparable selling price for that item in department and/or specialty stores.

        The Ross pricing strategy differs from that of a department or specialty store. Ross purchases its merchandise at lower prices and marks it up less than a department or specialty store. This strategy enables Ross to offer customers consistently low prices. Specified departments in the store are reviewed weekly for possible markdowns based on the rate of sale and the end of fashion seasons to promote faster turnover of inventory and accelerate the flow of fresh merchandise.

The Ross Store

        As of February 2, 2002, the company operated 452 stores. They are conveniently located in predominantly community and neighborhood strip shopping centers in heavily populated urban and suburban areas. Where the size of the market permits, the company clusters stores to maximize economies of scale in advertising, distribution and field management.

        The company believes a key element of its success is its organized, attractive, easy-to-shop in-store environment, which allows customers to shop at their own pace. The Ross store is designed for customer convenience in its merchandise presentation, dressing rooms, checkout and merchandise return areas. The Ross store's sales area is based on a prototype single floor design with a racetrack aisle layout. A customer can locate desired departments by signs displayed just below the ceiling of each department. Ross encourages its customers to select among sizes and prices through prominent category and sizing markers, promoting a self-service atmosphere. At most stores, shopping carts and/or baskets are available at the entrance for customer convenience. All cash registers are centrally located at store entrances for customer ease and efficient staffing.

        The company minimizes transaction time for the customer at the checkout counter by using electronic systems for scanning each ticket at the point of sale and authorizing credit for personal checks and credit cards in a matter of seconds. Approximately 45% of payments are made with credit cards. Ross provides cash or credit card refunds on all merchandise returned with a receipt within 30 days. Merchandise returns having a receipt older than 30 days are exchanged or credited with a Ross Credit Voucher at the price on the receipt.

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Operating Costs

        Consistent with the other aspects of its business strategy, Ross strives to keep operating costs as low as possible. Among the factors which have enabled the company to operate at low costs are:

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Labor costs that generally are lower than full-price department and specialty stores due to (i) a store design that creates a self-selection 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 decisions.



•

Model store layout criteria which facilitate conversion of existing buildings to the Ross format.

Distribution

        The company has two distribution centers—one located in Newark, California (approximately 494,000 square feet) and the second located in Carlisle, Pennsylvania (approximately 424,000 square feet). Having a distribution center on each coast enhances cost efficiencies per unit and decreases turn-around time in getting the merchandise from the vendors to the stores. Shipments are made by contract carriers to the stores about five times a week depending on location. The company believes that its two distribution centers, combined with utilization of third party processors, can provide adequate processing capacity to support store growth until its new southeast distribution center located in South Carolina is on line in July, 2002.

        The company is constructing two new 1.3 million square foot distribution centers, one in South Carolina, which is expected to be complete in July 2002 and one in Southern California, which is expected to be complete in August 2003 (see further discussion in Management Discussion and Analysis).

Control Systems

        During 2001, the company maintained its focus on improving systems, including;

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Implementation of a new transportation management system to optimize loads and routing for inbound freight.



•

Implementation of a refund control system to reduce fraudulent returns and inventory shrinkage.



•

Began installation of a new financial system with completion targeted in 2002. The new financial system will feature web-enabled technology, intranet capability and automation of many manual processes.



•

Began implementation of a new Warehouse Management System to be rolled out in the new Southeast distribution center in July 2002.

        During 2002 and 2003, the company plans to develop a new core merchandising system to provide better inventory and sales data, which should allow for more accurate product allocation by store, by color and by size. This new system is targeted for completion by the end of 2003 and eventually is expected to support regional pricing and improved markdown capability.

Advertising

        The company relies primarily on television advertising to communicate its value proposition, brand name merchandise at low everyday prices. This strategy reflects the company's belief that television is the most efficient and cost effective medium for communicating everyday savings on a wide selection of brand-name bargains for both the family and home.

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Trademarks

        The trademark for Ross Dress For Less® has been registered with the United States Patent and Trademark Office.

Employees

        On February 2, 2002, the company had approximately 21,000 employees which includes an estimated 10,900 part-time employees. Additionally, the company hires temporary employees—especially during the peak seasons. The company's employees are non-union. Management of the company considers the relationship between the company and its employees to be good.

Competition

        The company believes the principal competitive factors in the off-price retail apparel and home accessories industry are offering large discounts on name-brand merchandise appealing to its target customer and consistently providing a store environment that is convenient and easy to shop. To execute this concept, the company has strengthened its buying organization and developed a merchandise allocation system to distribute product based on regional factors, as well as other systems and procedures to maximize cost efficiencies and leverage expenses in an effort to mitigate competitive pressures on gross margin. The company believes that it is well positioned to compete on the basis of each of these factors.

        Nevertheless, the national apparel retail market is highly fragmented. Ross faces intense competition for business from department stores, specialty stores, discount stores, other off-price retailers and manufacturer-owned outlet stores, many of which are units of large national or regional chains that have substantially greater resources than Ross. The retail apparel business may become even more competitive in the future.

ITEM 2.    PROPERTIES

Stores

        From August 1982 to February 2, 2002, the company expanded from six stores in California to 452 stores in 22 states: Arizona, California, Colorado, Florida, Georgia, Hawaii, Idaho, Maryland, Montana, Nevada, New Jersey, New Mexico, North Carolina, South Carolina, Oklahoma, Oregon, Pennsylvania, Texas, Utah, Virginia, Washington and Wyoming. The company also operates a store in Guam. All stores are leased, with the exception of two locations.

        During fiscal 2001, the company opened 45 new Ross 'Dress For Less' stores and closed two existing locations. The average new Ross store in 2001 was approximately 30,300 square feet, yielding about 25,000 square feet of selling space. As of February 2, 2002, the company's 452 stores generally ranged in size from about 24,000 to 35,000 gross square feet and had an average of 23,000 square feet of selling space.

        During the fiscal year ended February 2, 2002, no one store accounted for more than 1% of the company's sales. The company carries earthquake insurance on its corporate headquarters, both distribution centers and on all of its stores.

        The company's real estate strategy is to open additional stores mainly in existing market areas, to increase its market penetration and reduce overhead and advertising expenses as a percentage of sales in each market. Important considerations in evaluating a new market are the availability of potential sites, demographic characteristics, competition and population density of the market. In fiscal 2001, the company entered new markets in Georgia, North Carolina, South Carolina, Montana and Wyoming,

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while also continuing to open stores in its existing markets. In addition, management continues to consider opportunistic real estate acquisitions.

        Where possible, the company has obtained sites in existing buildings requiring minimal alterations. This has allowed Ross to establish stores in new locations in a relatively short period of time at reasonable costs in a given market. To date, the company has been able to secure leases in suitable locations for its stores. At February 2, 2002, the majority of the company's stores had unexpired original lease terms ranging from three to ten years with three to four renewal options of five years each. The average unexpired original lease term of its leased stores is five years, or 20 years if renewal options are included. (See Note C of Notes to Consolidated Financial Statements.)

        See additional discussion under "The Ross Store" paragraph in Item 1.

Distribution Centers

        In June 1998, the company purchased its Newark, California distribution center (approximately 494,000 square feet) for $24.6 million. The Newark facility is also the company's corporate headquarters. The company also owns its distribution center in Carlisle, Pennsylvania (approximately 424,000 square feet). Having a processing distribution center on each coast enhances cost efficiencies per unit and decreases turn-around time in getting the merchandise from the vendors to the stores. Shipments are made by contract carriers to the stores about five times a week depending on location.

        In September 1997, the company entered into a five-year lease for an approximately 214,500 square foot warehouse in Newark, California. In November 1998, the company entered into a five-year lease for an additional 97,000 square foot warehouse in Newark, California. In November 2001, the company entered into a nine-year lease for an approximately 239,000 square foot warehouse in Carlisle, Pennsylvania. In November 2001, the company leased an additional 246,000 square foot warehouse in Carlisle, Pennsylvania, for a ten-year term. All of these properties store the company's packaway inventory. In August 1999, Ross leased for a 50-month term a 32,000 square foot warehouse on ten acres in Newark, California. This location is primarily used for the storage of certain supplies and equipment.

        The company is constructing a new 1.3 million square foot distribution center in South Carolina, which is expected to be complete in July 2002. In April 2002, the company began construction on another new 1.3 million square foot distribution center in Southern California, which is expected to be complete in August 2003 (see further discussion in Management Discussion and Analysis).

ITEM 3.    LEGAL PROCEEDINGS

        The company is a party to routine litigation incident to its business. Management believes that none of these routine legal proceedings will have a material adverse effect on the company's financial condition or results of operations.

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ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

        The following list sets forth the names and ages of all executive officers of the company, indicating each person's principal occupation or employment during at least the past five years. The term of office is at the pleasure of the Board of Directors.

        Mr. Balmuth joined the Board of Directors as Vice Chairman and became Chief Executive Officer in September 1996. Prior to that, he served as the company's Executive Vice President, Merchandising since July 1993 and Senior Vice President and General Merchandising Manager since November 1989. Before joining Ross, he was Senior Vice President and General Merchandising Manager at Bon Marché in Seattle from September 1988 through November 1989. From April 1986 to September 1988, he served as Executive Vice President and General Merchandising Manager for Karen Austin Petites.

        Mr. Peters joined the company as President and Chief Operating Officer and a member of the Board of Directors in August 2000. Prior to joining Ross, Mr. Peters served at Staples as President, U.S. Retail from March 1998 to July 2000 and as Executive Vice President of U.S. Stores from September 1997 to February 1998. Prior to joining Staples, he was employed by Office Depot from August 1994, where he held various operating positions and last served as Vice President of Stores for Office Depot's Western Division.

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        Mr. Askanas joined the company as General Counsel and Senior Vice President, Human Resources, in January 2001. Prior to joining Ross, Mr. Askanas served as a partner since January 1993 in the San Francisco office of Jackson, Lewis, Schnitzler & Kurpman, a national law firm specializing in employment and labor law, employee benefits and related litigation.

        Mr. Call has served as Senior Vice President, Chief Financial Officer and Corporate Secretary since June 1997. From June 1993 until joining Ross in 1997, Mr. Call was Senior Vice President, Chief Financial Officer, Secretary and Treasurer of Friedman's Inc. For five years prior to joining Friedman's in June 1993, Mr. Call held various positions with Ernst & Young LLP, most recently as a Senior Manager in the San Francisco office.

        Mr. Fassio has served as Senior Vice President, Property Development, Construction and Store Design since March 1991. He joined the company in June 1988 as Vice President of Real Estate. Prior to joining Ross, Mr. Fassio was Vice President, Real Estate and Construction at Craftmart and Property Director of Safeway Stores, Inc.

        Mr. Gluck has served as Senior Vice President and General Merchandising Manager since August 1993. He joined the company in February 1989 as Vice President and Divisional Merchandising Manager. Prior to joining Ross, Mr. Gluck served as General Merchandising Manager, Vice President for Today's Man from May 1987 to February 1989. From March 1982 to April 1987, he was Vice President, Divisional Merchandising Manager, Men's, Young Men's, Children's and Luggage at Macy's Atlanta.

        Mr. Hamilton has served as Senior Vice President, Store Operations since March 1999. From October 1996 to March 1999, he was Executive Vice President, Operations for Hill's Department Stores. From April 1993 to October 1996, he served as Executive Vice President, Stores for Venture Stores. Prior to that, he held various executive and managerial positions at Venture Stores.

        Ms. Irene Jamieson has served as Senior Vice President and General Merchandising Manager since January 1995. From December 1992 to January 1995, she served as Vice President and Divisional Merchandising Manager. Prior to joining Ross, Ms. Jamieson served as Vice President and Divisional Merchandising Manager of the Home Store for Lord & Taylor from September 1983 to December 1992.

        Ms. Megan Jamieson has served as Senior Vice President, Strategic Planning since February 1999. From January 1997 to February 1999, she served as Director of Strategy for Sears, Roebuck and Co.'s full-line store division. Prior to Sears, she was a case team leader with the consulting firm Bain & Co.

        Ms. Levy has served as Senior Vice President and General Merchandising Manager since May 1993. Prior to joining Ross, Ms. Levy was with R. H. Macy & Co., Inc., serving as its Senior Vice President and General Merchandising Manager from January 1992 to April 1993, its Regional Director—Stores from May 1989 to January 1992, and from August 1985 to May 1989 as its Divisional Merchandising Manager—Better Sportswear.

        Ms. Rentler has served as Senior Vice President and General Merchandising Manager since March 2001. She joined Ross in February 1986 and most recently served as Vice President and Group Divisional Merchandise Manager from March 1999 to February 2001. Prior to that, she was Vice President and Divisional Merchandise Manager from March 1996 to February 1999. From December 1993 to February 1996 she held the position of Counselor.

        Mr. White has served as Senior Vice President and Chief Information Officer since July 2001. From 1998 until joining Ross Stores, he was President of Matthews, White & Company, which specializes in general management and strategy consulting to start-up companies as well as established enterprises. Mr. White was the founder and Chief Executive Officer of Intrepid Systems from 1991 until 1998, when they were acquired by PeopleSoft, where he served as Vice President of Business

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Development for Retail until 1999. Before founding Intrepid Systems, Mr. White was the Chief Information Officer of Office Club for five years, after spending four years as a consultant for Deloitte & Touche.

        Mr. Wilson has served as Senior Vice President, Distribution and Transportation since May 1999. From July 1996 to May 1999, he was President of Distribution Fulfillment Services, Inc., a division of the Spiegel Group, and from October 1991 to July 1996, he served in various distribution management positions with the Spiegel Group. Prior to joining the Spiegel Group, he held the position of Division Vice President/Merchandise Processing for Rich's Department Stores. Prior to 1991, he held various operating positions within the transportation, third party distribution and retail distribution environment, with companies that included McLean Trucking, Ivey's Department Stores and Distribution Marking Services, Inc.

PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        General Information.    See the information set forth under the caption "Quarterly Financial Data (Unaudited)" under Note I of Notes to Consolidated Financial Statements in Item 8 of this document, which is incorporated herein by reference. The company's stock is traded on the Nasdaq National Market tier of The Nasdaq Stock Market^SM under the symbol ROST. There were 759 stockholders of record as of March 29, 2002 and the closing stock price on that date was $37.83 per share

        Cash Dividends.    In January 2002, a quarterly cash dividend payment of $.0475 per common share was declared by the company's Board of Directors, payable on or about April 1, 2002. The Board of Directors declared quarterly cash dividends of $.0425 per common share in January, May, August and November 2001 and $.0375 per common share in January, May, August and November 2000.

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ITEM 6.    SELECTED FINANCIAL DATA

(1)

Fiscal 2000 is a 53-week year; all other fiscal years are 52 weeks.

(2)

Fiscal 1999 includes a non-recurring pre-tax charge of $9.0 million, or $.06 per share, related to litigation. See Note H of Notes to Consolidated Financial Statements.

(3)

All per share information is adjusted to reflect the effect of the two-for-one stock splits effected in the form of 100% stock dividends paid on September 22, 1999 and March 5, 1997.

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(1)

Fiscal 2000 is a 53-week year; all other fiscal years are 52 weeks.

(2)

Fiscal 1999 includes a non-recurring pre-tax charge of $9.0 million, or $.06 per share, related to litigation. See Note H of Notes to Consolidated Financial Statements.

(3)

All per share information is adjusted to reflect the effect of the two-for-one stock splits effected in the form of 100% stock dividends paid on September 22, 1999 and March 5, 1997.

(4)

Based on average annual selling square footage.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The fiscal years ended February 2, 2002, February 3, 2001 and January 29, 2000 are referred to as 2001, 2000 and 1999, respectively. Fiscal 2001 and 1999 were 52-week years, and fiscal 2000 was a 53-week year.

Results of Operations

        Stores.    Total stores open at the end of 2001, 2000 and 1999 were 452, 409 and 378, respectively.

        Sales.    The 10% total sales increase for 2001 reflects a 3% increase in comparable store sales, the opening of 43 net new stores in 2001, and the full year impact of 2000 store openings. The 10% total sales increase in 2000 reflects a 1% increase in comparable store sales, the opening of 31 net new stores, and the full year impact of 1999 store openings. The 13% total sales increase in 1999 reflects a 6% increase in comparable store sales, the opening of 29 net new stores, and the full year impact of 1998 store openings. The company anticipates that the competitive climate for apparel and off-price retailers will continue in 2002. Management expects to address that challenge by pursuing and refining the company's existing strategy and by continuing to strengthen the merchandise organization, diversifying the merchandise mix, and more fully developing the organization and systems to strengthen regional merchandise offerings. Although the company's existing strategies and store expansion program contributed to sales and earnings gains in 2001, 2000 and 1999, there can be no assurance that these strategies will result in a continuation of revenue and profit growth.

        Cost of Goods Sold and Occupancy.    The increase in the cost of goods sold and occupancy ratio in 2001 compared to 2000 resulted mainly from a lower initial mark-up and a lower leverage on occupancy costs in 2001 when compared to the 53 weeks in fiscal 2000, partially offset by lower freight costs as a percentage of sales. The increase in the cost of goods sold and occupancy ratio in 2000

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compared to 1999 resulted mainly from an increase in freight expense and a higher rate of markdowns, partially offset by a slightly higher initial mark-up. There can be no assurance that the gross profit margins realized in 2001, 2000 and 1999 will continue in future years.

        General, Selling and Administrative Expenses.    During 2001 and 2000, general, selling and administrative expenses as a percentage of sales rose primarily due to higher store payroll and benefit costs and an increase in distribution center expenses.

        The largest component of general, selling and administrative expenses is payroll. The total number of employees, including both full- and part-time, at year-end 2001, 2000 and 1999 was approximately 21,000, 19,800 and 18,400, respectively.

        Depreciation and Amortization.    Depreciation and amortization as a percentage of sales have remained relatively constant over the last three years, due primarily to the consistent level of fixed assets in each store.

        Provision for Litigation Expense.    In 1999 the company recorded a non-recurring pre-tax charge of $9.0 million, without any admission of wrongdoing, related to the settlement of a class action complaint alleging that store managers and assistant managers in California were incorrectly classified as exempt from state overtime laws. The Settlement was paid in 2000. See Note H of Notes to Consolidated Financial Statements.

        Taxes on Earnings.    The company's effective tax rate for 2001, 2000 and 1999 was 39%, which represents the applicable federal and state statutory rates reduced by the federal benefit received for state taxes. During 2002, the company expects its effective tax rate to remain at approximately 39%.

Financial Condition

Liquidity and Capital Resources.

        During 2001, the primary uses of cash, other than for operating expenditures, were for merchandise inventory, property and equipment to open 45 new stores, the relocation, remodeling or expansion of 14 stores, the repurchase in the open market of $131 million of the company's common stock, and quarterly cash dividend payments. During 2000, the primary uses of cash, other than for operating expenditures, were for merchandise inventory, property and equipment to open 34 new stores, the relocation, remodeling or expansion of 21 stores, the repurchase in the open market of $169 million of the company's common stock, and quarterly cash dividend payments. During 1999, the primary uses of cash, other than for operating expenditures, were for merchandise inventory, property and equipment to open 34 new stores, the relocation, remodeling or expansion of 14 stores, the repurchase in the open market of $120 million of the company's common stock, and quarterly cash dividend payments. In 2001, 2000 and 1999, the company spent approximately $86 million, $82 million and $74 million, respectively, for capital expenditures, net of leased equipment, that included fixtures and leasehold improvements to open new stores; relocate, remodel or expand existing stores; purchase previously leased equipment; update management information systems; and various other expenditures for existing stores and the central office.

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        In 2001, cash flows increased primarily due to a higher accounts payable balance as a percent of inventory, lower tax payments due to timing differences, and increased issuance of common stock related to stock option exercises. In 2000, cash flows decreased primarily due to higher repurchases of common stock and a lower accounts payable balance as a percentage of inventory.

        Working capital was $225 million at the end of 2001, compared to $197 million at the end of 2000 and $191 million at the end of 1999. At year-end 2001, 2000 and 1999, the company's current ratios were 1.5:1, 1.5:1 and 1.5:1, respectively.

        The company's primary source of liquidity is the sale of its merchandise inventory. Management regularly reviews the age and condition of the merchandise and is able to maintain current inventory in its stores through the replenishment processes and liquidation of non-current merchandise through clearance markdowns.

        During 2001, 2000 and 1999, liquidity and capital requirements were provided by cash flows from operations, bank credit facilities and trade credit. The company's store sites, certain warehouses and buying offices are leased and, except for certain leasehold improvements and equipment, do not represent long-term capital investments. The company owns its distribution center and corporate headquarters in Newark, California, and its distribution center in Carlisle, Pennsylvania. Short-term trade credit represents a significant source of financing for investments in merchandise inventory. Trade credit arises from customary payment terms and trade practices with the company's vendors. Management regularly reviews the adequacy of credit available to the company from all sources and has been able to maintain adequate lines to meet the capital and liquidity requirements of the company.

        The table below presents significant contractual payment obligations of the company at year-end 2001.

        Long-Term Debt.    At February 2, 2002, the company did not have any long-term debt outstanding.

        Operating Leases.    The company's store sites, certain warehouses and buying offices are leased and except for certain leasehold improvements and equipment, do not represent long-term capital investments. The company owns its distribution center and corporate headquarters in Newark, California, and its distribution center in Carlisle, Pennsylvania.

        Distribution Center Financings.    The company is constructing a new 1.3 million square foot distribution center in South Carolina, which is expected to be complete in July 2002. This center, including equipment and systems, is being financed under a $95 million, five-year operating lease, commonly referred to as a synthetic lease, which expires in March 2006. Upon completion, rent expense on the center will be payable monthly at the current rate of 90 basis points over 30-day LIBOR. At the end of the lease term, the company must refinance the $95 million synthetic lease facility, purchase the distribution center at cost, or arrange a sale of the distribution center to a third party. The company's potential estimated purchase obligation of $95 million is included in Other long-term obligations in the table above.

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        In April 2002, construction began on another 1.3 million square foot distribution center, which is expected to be complete in August 2003. This new center is located in Perris, California about 70 miles southeast of Los Angeles, a desirable location for both sourcing and shipping of product. Approximately 25% of the company's store base is in the southwest region of the country, and the majority of its west coast merchandise receipts originate in Southern California. The Perris distribution center will feature the same warehouse management systems and technology being installed in the new South Carolina center. The company believes the new Perris center should improve supply chain logistics and efficiencies, and result in higher distribution center productivity and lower freight costs. As a result, the company plans to transfer its primary west coast distribution capabilities from its current 18 year-old Newark distribution center to the new Perris center during the third quarter of 2003, or once the Perris center is fully operational.

        The land and building portion of the new Perris center is being financed under an $80 million, five-year synthetic lease facility, which expires in December 2006. Upon completion, rent expense on this center will be payable monthly at the current rate of approximately 85 basis points over the applicable commercial paper or 30-day LIBOR rate. At the end of the lease term, the company must refinance the $80 million synthetic lease facility, purchase the distribution center at cost, or arrange a sale of the distribution center to a third party. If the distribution center is sold to a third party for less than the amount financed by the lessor, or $80 million, the company has agreed under a residual value guarantee to pay the lessor up to 87% of the amount financed. The company's potential estimated purchase obligation of $80 million is included in Other long-term obligations in the table above. Management expects to finance the equipment and systems for the Perris, California center with a $50 million, five-year unsecured borrowing facility.

        The two synthetic lease facilities described above have covenant restrictions generally consistent with the company's revolving credit agreement. In addition, the credit spread under these agreements may vary depending on certain interest coverage ratio tests that are generally consistent with the company's revolving credit agreement. The company's future obligations under both synthetic leases are included in Synthetic leases in the table above.

        The table below presents significant commercial credit facilities available to the company at year-end 2001.

*

Contains a $75 million sublimit for issuances of letter of credit.
For additional information relating to these credit facilities, refer to Note B of the Notes to the Consolidated Financial Statements

        Revolving Credit Facility.    In August 2001, the company entered into a new three-year, $350 million revolving credit facility with its banks, which contains a $75 million sublimit for issuances of letters of credit, replacing its prior $160 million bank credit agreement, $30 million letter of credit facility, and $35 million uncommitted bank line arrangement. Interest is LIBOR-based and is payable upon borrowing maturity but no less than quarterly. Borrowing under this credit facility is subject to the company maintaining certain interest rate coverage and leverage ratios. At year-end 2001 the company had no amounts outstanding under the new facility.

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        Standby Letters of Credit.    The company had $28.8 million and $12.6 million in standby letters of credit outstanding at year-end 2001 and 2000, respectively.

        Trade Letters of Credit.    The company had $9.7 million and $11.8 million in trade letters of credit outstanding at year-end 2001 and 2000, respectively.

        Capital Expenditures.    The company is forecasting approximately $105 million to $120 million in capital expenditures for fiscal 2002 to fund fixtures and leasehold improvements to open about 50 to 55 net new stores, relocate, remodel or expand numerous existing stores, and to make investments in store and merchandising systems, distribution center equipment and systems and various central office expenditures.

        Dividends.    In January 2002, a quarterly cash dividend payment of $.0475 per common share was declared by the company's Board of Directors, payable on or about April 1, 2002. The Board of Directors declared quarterly cash dividends of $.0425 per common share in January, May, August and November 2001 and $.0375 per common share in January, May, August and November 2000.

        Stock Repurchase Program.    In January 2002, the company announced that the Board of Directors authorized a new stock repurchase program of up to $300 million over two years. The company repurchased a total of $131 million and $169 million of common stock during 2001 and 2000, respectively, under a prior program.

        The company estimates that cash flows from operations, existing bank credit lines and trade credit are adequate to meet operating cash needs, fund the aforementioned planned capital investments, repurchase common stock and make quarterly dividend payments for at least the next twelve months.

New Accounting Pronouncements

        SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, requires the company to record all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value, and is effective for all fiscal years beginning after June 15, 2000. The company implemented SFAS No. 133, as amended, on February 4, 2001. Adoption of this statement did not have a material impact on the company's financial position or results of operations.

        In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets" (effective for the company on February 3, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and certain intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The adoption of the new standards is not expected to have a material impact on the company's financial position or results of operations.

        In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS No. 144 became effective for the company on February 3, 2002. Adoption of this standard is not expected to have a material effect on the company's financial position or results of operations.

Critical Accounting Policies

        The preparation of the company's consolidated financial statements requires the company to make estimates and assumptions that affect the reported amounts. The estimates and assumptions are evaluated on an on-going basis and are based on historical experience and on various other factors that

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are believed to be reasonable. Estimates and assumptions include, but are not limited to, long-lived assets and the review of their impairment, self-insurance reserves, and sales return reserve.

        The estimate recorded for self-insurance reserves for workers' compensation and general liabilities is the company's most critical estimate and assumption used in the preparation of the consolidated financial statements. The self-insurance liability is determined actuarially, based on claims filed and an estimate of claims incurred but not reported. Should a greater amount of claims occur compared to what is estimated or the costs of the medical profession increase beyond what was anticipated, reserves recorded may not be sufficient and additional costs to the consolidated financial statements could be required.

Forward-Looking Statements and Factors Affecting Future Performance

        This report includes a number of forward-looking statements, which reflect the company's current beliefs and estimates with respect to future events and the company's future financial performance, operations and competitive position. The words "expect," "anticipate," "estimate," "believe," "looking ahead," "forecast," "plan" and similar expressions identify forward-looking statements.

        The company's continued success depends, in part, upon its ability to increase sales at existing locations, to open new stores and to operate stores on a profitable basis. There can be no assurance that the company's existing strategies and store expansion program will result in a continuation of revenue and profit growth. Future economic and industry trends that could potentially impact revenue and profitability remain difficult to predict.

        The forward-looking statements that are contained in this report are subject to risks and uncertainties that could cause the company's actual results to differ materially from historical results or current expectations. These factors include, without limitation, a general deterioration in economic trends, ongoing competitive pressures in the apparel industry, the company's ability to obtain acceptable store locations, the company's ability to continue to purchase attractive name-brand merchandise at desirable discounts, the company's ability to successfully open distribution centers in South Carolina and Southern California in a timely and cost-effective manner, the company's ability to successfully extend its geographic reach into new markets, unseasonable weather trends, changes in the level of consumer spending on or preferences in apparel or home-related merchandise, the company's ability to attract and retain the retail talent necessary to execute its strategies, the company's ability to implement and integrate various new systems and technologies, and greater than planned costs. In addition, the company's corporate headquarters, one of its distribution centers and 37% of its stores are located in California. Therefore, a downturn in the California economy or a major natural disaster there could significantly affect the company's operating results and financial condition.

        In addition to the above factors, the apparel industry is highly seasonal. The combined sales of the company for the third quarter and fourth (holiday) fiscal quarter are historically higher than the combined sales for the first two fiscal quarters. The company has realized a significant portion of its profits in each fiscal year during the fourth quarter. If intensified price competition, lower than anticipated consumer demand or other factors were to occur during the third and fourth quarters, and in particular during the fourth quarter, the company's fiscal year results could be adversely affected.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The company is exposed to market risks, which primarily includes changes in interest rates. The company does not engage in financial transactions for trading or speculative purposes. Interest that is payable on the company's credit facilities is based on variable interest rates and is, therefore, affected by changes in market interest rates. In addition, lease payments under the company's synthetic lease agreements are determined based on variable interest rates and are, therefore, affected by changes in market interest rates. These lease payments will begin upon completion of construction of each new distribution center. As of February 2, 2002, the company did not have any long-term debt outstanding. The company does not use derivative financial instruments in its investment portfolio.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENTS OF EARNINGS

The accompanying notes are an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

        The fiscal years ended February 2, 2002, February 3, 2001 and January 29, 2000 are referred to as 2001, 2000 and 1999, respectively. Fiscal 2000 is a 53-week year. All other years are 52 weeks.

Note A: Summary of Significant Accounting Policies

        Business.    The company is an off-price retailer of first-quality, branded apparel, shoes and accessories for the entire family, as well as gift items, linens and other home-related merchandise. At February 2, 2002, the company operated 452 stores in 22 states and Guam, supported by two distribution centers. The company's headquarters, one distribution center, three warehouses and 37% of its stores are located in California.

        Basis of Presentation.    The consolidated financial statements include the accounts of the company and its subsidiaries, all of which are wholly owned. Inter-company transactions and accounts have been eliminated. Certain reclassifications have been made in the 2000 and 1999 financial statements to conform to the 2001 presentation.

        Use of Accounting Estimates.    The preparation of financial statements in conformity with generally accepted accounting principles requires management 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The company's significant accounting estimates include long-lived assets and the review of their impairment, self insurance reserves, and sales return reserve.

        Cash Equivalents.    Cash equivalents are highly liquid, fixed income instruments purchased with a maturity of three months or less.

        Merchandise Inventory.    Merchandise inventory is stated at the lower of cost (determined using a weighted average basis) or net realizable value.

        Property and Equipment.    Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful life of the asset, typically ranging from five to twelve years for equipment and 20 to 40 years for real property. The cost of leasehold improvements is amortized over the useful life of the asset or the applicable lease term, whichever is less. Computer hardware and software costs are included in fixtures and equipment and are amortized over their estimated useful life of five years. Reviews for impairment are performed whenever events or circumstances indicate the carrying value of an asset may not be recoverable.

        Intangible Assets.    Included in long-term assets are lease rights, consisting of payments made to acquire store leases, which are amortized over the remaining life of the lease. Also included in other long-term assets is the excess of cost over the acquired net assets, which is amortized on a straight-line basis over a period of 40 years.

        Long-Lived Assets.    Long-lived assets and certain identifiable intangibles, including goodwill, held and used by the company, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on the company's review as of February 2, 2002 and February 3, 2001, no adjustments were recognized to the carrying value of such assets.

        Store Closures.    The company continually reviews the operating performance of individual stores and records a provision for closing costs at the date management commits to closing a store. Operating costs, including depreciation, of stores to be closed are expensed during the period they remain in use.

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        Accounts Payable.    Accounts payable represents amounts owed to third parties at the end of the period. The company included outstanding checks in accounts payable of approximately $65.4 million and $77.7 million at year-end 2001 and 2000, respectively.

        Self Insurance.    The company is self insured for workers' compensation, general liability costs and certain health insurance plans. The self-insurance liability is determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported.

        Deferred Rent.    When a lease requires fixed escalations of the minimum lease payments, rental expense is recorded on a straight-line basis and the difference between the average rental amount charged to expense and the amount payable under the lease is recorded as deferred rent. At the end of 2001 and 2000, the balance of deferred rent was $15.3 million and $13.3 million, respectively, and is included in long-term liabilities.

        Estimated Fair Value of Financial Instruments.    The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximates their estimated fair value. The company's long-term debt represents amounts outstanding under the company's $350 million revolving line of credit agreement, which are expected to be outstanding for a twelve month period. The interest rate fluctuates monthly based on the LIBOR rates. Due to the floating interest rates on the debt, the carrying value approximates its estimated fair value.

        Effects of Inflation.    The effects of inflation are not material to the company's financial position and results of operations.

        Stock-Based Compensation.    The company accounts for stock-based awards to employees using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," are set forth in Note F.

        Revenue Recognition.    The company recognizes revenue at the point of sale, net of actual returns, and maintains a provision for estimated future returns.

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

        Advertising.    Advertising costs are expensed in the period incurred. Advertising expenses for the fiscal years ended 2001, 2000 and 1999 were $33.1 million, $29.6 million and $32.1 million, respectively.

        Taxes on Earnings.    SFAS No. 109, "Accounting for Income Taxes," requires income taxes to be accounted for under an asset and liability approach that 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 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 rates.

        Stock Dividend.    All share and per share information has been adjusted to reflect the effect of the company's two-for-one stock split effected in the form of a 100% stock dividend paid on September 22, 1999.

        Earnings Per Share (EPS).    SFAS No. 128, "Earnings Per Share," requires earnings per share to be computed and reported as both basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted average number of common shares and dilutive common stock equivalents (stock awards and stock options) outstanding during the period. Dilutive EPS reflects the potential dilution that could occur if options to issue common stock were exercised into common stock. There were no other securities that could potentially dilute basic EPS in the future

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that were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive in the periods presented.

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

        Segment Reporting.    The company accounts for its operations as one operating segment. The company's operations include only activities related to off-price retailing in similar stores throughout the United States and, therefore, comprise only one segment.

        Comprehensive income.    Comprehensive income equals net income for all periods presented.

        Derivative Instruments and Hedging Activities.    SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, requires the company to record all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. The company implemented SFAS No. 133, as amended, on February 4, 2001. Adoption of this statement did not have a material impact on the company's financial position or results of operations.

        New Accounting Pronouncements.    In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets" (effective for the company on February 3, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and certain intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. The adoption of the new standards is not expected to have a material impact on the company's financial position or results of operations.

        In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS No. 144 became effective for the company on February 3, 2002. Adoption of this standard is not expected to have a material effect on the company's financial position or results of operations.

Note B: Long-Term Debt

        The company had no debt outstanding at year-end 2001, and $30.0 million of debt classified as long-term at year-end 2000. The weighted average interest rates on borrowings during 2001 and 2000 were 4.7% and 6.8%, respectively.

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        Bank Credit Facilities.    In August 2001, the company entered into a new three-year, $350 million revolving credit facility, which contains a $75 million sublimit for issuances of letters of credit, replacing its prior $160 million bank credit agreement, $30 million letter of credit facility, and $35 million uncommitted bank line arrangement. Interest is LIBOR based and is payable upon borrowing maturity but no less than quarterly. Borrowing under this credit facility is subject to the company maintaining certain interest rate coverage and leverage ratios. At year-end 2001 the company had no amounts outstanding under the new facility. In addition, the company had $28.8 million and $12.6 million in standby letters of credit and $9.7 million and $11.8 million in trade letters of credit outstanding at year-end 2001 and 2000, respectively.

Note C: Leases

        The company leases five separate warehouse facilities in Newark, California and Carlisle, Pennsylvania, with operating leases expiring in various years through 2011, with one or two renewal options of up to three years each. These five leased facilities are being used primarily to store packaway merchandise. In addition, the company leases its store sites, selected computer and related equipment, and certain distribution center equipment under operating leases with original, non-cancelable terms that in general range from three to 15 years, expiring through 2015. Store leases typically contain provisions for three to four renewal options of five years each. Most store leases also provide for minimum annual rentals, with provisions for additional rent based on percentage of sales and for payment of certain expenses.

        The company is constructing a new 1.3 million square foot distribution center in South Carolina, which is expected to be complete in July 2002. This center is being financed under a $95 million, five-year operating lease, commonly referred to as a synthetic lease, which expires in March 2006. Upon completion, rent expense on the center will be payable monthly at the current rate of 90 basis points over 30-day LIBOR. At the end of the lease term, the company must refinance the $95 million synthetic lease facility, purchase the distribution center at cost, or arrange a sale of the distribution center to a third party.

        In April 2002, construction began on another 1.3 million square foot distribution center, which is expected to be complete in August 2003. This new center is located in Perris, California about 70 miles southeast of Los Angeles, a desirable location for both sourcing and shipping of product. Approximately 25% of the company's store base is in the southwest region of the country, and the majority of its west coast merchandise receipts originate in Southern California. The Perris distribution center will feature the same warehouse management systems and technology being installed in the new South Carolina center. The company believes the new Perris center should improve supply chain logistics and efficiencies, and result in higher distribution center productivity and lower freight costs. As a result, the company plans to transfer its primary west coast distribution capabilities from its current 18 year-old Newark distribution center to the new Perris center during the third quarter of 2003, or once the Perris center is fully operational.

        The land and building portion of the new Perris center is being financed under an $80 million, five-year synthetic lease facility, which expires in December 2006. Upon completion, rent expense on this center will be payable monthly at the current rate of approximately 85 basis points over the applicable commercial paper or 30-day LIBOR rate. At the end of the lease term, the company must refinance the $80 million synthetic lease facility, purchase the distribution center at cost, or arrange a sale of the distribution center to a third party. If the distribution center is sold to a third party for less than the amount financed by the lessor, or $80 million, the company has agreed under a residual value guarantee to pay the lessor up to 87% of the amount financed. Management expects to finance the equipment and systems for the Perris, California center with a $50 million, five-year unsecured borrowing facility.

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        The two synthetic lease facilities described above have covenant restrictions generally consistent with the company's revolving credit agreement. In addition, the credit spread under these agreements may vary depending on certain interest coverage ratio tests that are generally consistent with the company's revolving credit agreement.

        The aggregate future minimum annual lease payments under leases in effect at year-end 2001 are as follows:

        Total rent expense for all operating leases is as follows:

Note D: Taxes on Earnings

        The provision for taxes consists of the following:

        In 2001, 2000 and 1999, the company realized tax benefits of $12.1 million, $4.8 million and $9.2 million, respectively, related to stock options exercised and the vesting of restricted stock that were credited to additional paid-in capital.

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        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 as follows:

        The components of the net deferred tax assets at year-end are as follows: