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Stores. Total stores open at the end of 2000, 1999 and 1998 were 409, 378 and 349, respectively. During 2000, the company opened 34 new stores and closed three stores. During 1999, the company opened 34 new stores and closed five stores. During 1998, the company opened 26 new stores and closed two stores.

Sales. The increases in sales for 2000, 1999 and 1998 were due to a greater number of stores in operation and an increase in comparable store sales. The company anticipates that the competitive climate for apparel and off-price retailers will continue in 2001. Management expects to address that challenge 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 2000, 1999 and 1998, 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 2000 resulted mainly from an increase in freight expense as a percentage of sales and a higher rate of markdowns, partially offset by a slightly higher initial mark-up. The reduction in the cost of goods sold and occupancy ratio in 1999 resulted primarily from an increase in the initial mark-up from purchasing more opportunistically and leverage on occupancy costs. There can be no assurance that the gross profit margins realized in 2000, 1999 and 1998 will continue in future years.

General, Selling and Administrative Expenses. During 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. During 1999, general, selling and administrative expenses as a percentage of sales increased primarily due to higher benefit costs, credit card fees and management incentive plan 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 2000, 1999 and 1998, was approximately 19,800, 18,400 and 16,900, 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 store managers and assistant managers in California were incorrectly classified as exempt from state overtime laws. See Note G of Notes to Consolidated Financial Statements.

Taxes on Earnings. The company's effective tax rate for 2000, 1999 and 1998 was 39%, which represents the applicable federal and state statutory rates reduced by the federal benefit received for state taxes. During 2001, the company expects its effective tax rate to remain at approximately 39%. Additionally, the increase in income taxes paid in 2000 and 1999 resulted primarily from an increase in pre-tax earnings and timing differences in the payment of taxes between the years.


Financial Condition

Liquidity and Capital Resources. During 2000, 1999 and 1998, 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. Commitments related to operating leases are described in Note C of Notes to Consolidated Financial Statements. 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 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.

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. During 1998, the primary uses of cash, other than for operating expenditures, were for merchandise inventory, property and equipment to open 26 new stores, the relocation, remodeling or expansion of 20 stores, the repurchase in the open market of $110 million of the company's common stock, the purchase of the company's Newark, California, distribution center and corporate headquarters for $24.6 million, and quarterly cash dividend payments. In 2000, 1999 and 1998, the company spent approximately $82.1 million, $74.0 million and $78.5 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; and various other expenditures for existing stores and the central office.

The company is forecasting approximately $95 million in capital expenditures for fiscal 2001 to fund fixtures and leasehold improvements to open about 35 to 40 net new stores, relocate, remodel or expand numerous existing stores, and to make investments in information and distribution center systems and various central office expenditures. In addition, the company expects to enter into an agreement in 2001 to lease a 108 acre parcel of land near Charlotte, North Carolina, on which it plans to construct a 1.3 million square foot distribution center. The total turnkey cost for the land, distribution center and systems is projected to be about $90-100 million, which the company plans to finance with an operating lease.

In January 2001, a 13% increase in the quarterly cash dividend payment from $.0375 to $.0425 per common share was declared by the company's Board of Directors, payable on or about April 2, 2001. The Board of Directors declared quarterly cash dividends of $.0375 per common share in January, May, August and November 2000 and $.0325 per common share in January, May, August and November 1999. The company uses cash flows from operating activities and available credit facilities to fund dividend payments.

In January 2000, the company announced that the Board of Directors authorized a stock repurchase program of up to $300 million over two years. The company repurchased a total of $169 million of common stock during 2000 under this authorization, compared to $120 million in 1999.

The company has available under its principal credit agreement a $160 million revolving credit facility and a $30 million letter of credit facility, both of which expire in September 2002. At year-end 2000 and 1999, the company had $30.0 million and no amounts outstanding, respectively, under the revolving credit facility and $21.7 million and $20.3 million outstanding, respectively, under the letter of credit facility. In addition, the company had $12.6 million and $6.6 million in standby letters of credit outstanding at year-end 2000 and 1999, respectively. At year-end 1998 there were no amounts outstanding under any credit facility. For additional information relating to these obligations, refer to Note B of Notes to Consolidated Financial Statements.

Working capital was $197.0 million at the end of 2000, compared to $190.7 million at the end of 1999 and $170.8 million at the end of 1998. At year-end 2000, 1999 and 1998, the company's current ratios were 1.5:1, 1.5:1 and 1.4:1, 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 markdowns and clearances.

In both 2000 and 1999, cash flows decreased primarily due to higher repurchases of common stock and a lower accounts payable balance as a percentage of inventory.

The company has a $131 million stock repurchase authorization remaining for fiscal 2001. Management anticipates 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, complete the stock repurchase program and make quarterly dividend payments.


New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities". SFAS 133, as amended by SFAS 138 issued in June 2000, 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 plans to implement SFAS 133, as amended, on February 4, 2001 and does not believe it will have a material impact on its financial position and results of operations.


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, obtaining acceptable store locations, the availability of dependable energy resources at reasonable costs, the company's ability to continue to purchase attractive name-brand merchandise at desirable discounts, the company's ability to successfully open a third distribution center in the southeast 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 complete the remaining $131 million repurchase program in 2001 at purchase prices that result in accretion to earnings per share in line with expectations, and greater than planned costs. In addition, the company's corporate headquarters, one of its distribution centers and 41% 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.


Quantitative and Qualitative Disclosures About Market Risk

Management believes that the market risk associated with the company's ownership of market-risk sensitive financial instruments (including interest rate risk and equity price risk) as of February 3, 2001 is not material.