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ROST AT A GLANCE

P/E ► 15.3 AVG EV/EBITDA ► 8.22 AVG ROA ► 12.8% AVG ROE ► 31.3% HIGH Debt to Equity ► 1.45 AVG Current Ratio ► 1.38 LOW Interest Coverage Ratio ► 286 HIGH

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating ExpensesSG&AAmortization & Depreciation

Ross Stores, Inc. (NASDAQ:ROST) is America’s second-largest off-price retailer ^[1], behind competitor TJX Companies. It operates 890 stores in the US and Guam, targeting price-conscious middle class consumers and consumers from the lower-income brackets. The company's retail outlets are regionally concentrated in California, Texas and Florida, making its operating results highly dependent on these local economies. However, due to pressures from the 2008 recession and the weak retail environment, ROST has improved sources of obtaining closeout merchandise as general retailers try to clean out excess inventory caused by a slowdown in consumer demand.

The off-price retail sector has done well in recent years, growing at a CAGR over 15% compared to 4% for apparel retail overall. However, Ross has not been able to take advantage of this trends as difficulties in expansion and operational missteps during 2004 and 2005 hurt operating margins and same store sales. As more consumers turn to budget retail stores during the economic downturn, ROST faces strong competition from the market leader TJX Companies (TJX) as well as smaller competitors with established market niches, such as the high-end off-price retail store Filene's Basement owned by Retail Ventures (RVI).

[edit] Company Overview

Ross Stores, Inc. (ROST) is an off-price retailer that purchases unwanted inventory from name-brand manufacturers, department stores, and other retailers at an opportunistically low price. ROST then sells them at heavy discounts off the regular retail price to value-conscious consumers. ROST stores carry fewer types of retail items than department stores, but have expanded offerings in recent years to include maternity wear, small furniture, gourmet cookware, and jewelry. ^[2]

Some Key Business Drivers include: ^[2]

• Low COGS: ROST's business model relies on buying retail merchandise directly from suppliers such as regular retail department stores and specialty brand-name stores using off-price strategies. ROST supplies its stores through acquiring opportunistic goods from inventory overruns, such as close-out merchandise, and "packaways", which are mainly fashion basics held in inventory until the next appropriate sale season. Because close-out and packaway merchandise can usually be shipped to ROST stores during the season, ROST can offer in-season, brand-name items to its customers at large discounts.

• Low operating costs: As a significant part of ROST's low cost business strategy, the company keeps its labor costs low through a self-service store design and easily adapts its store layouts to existing building formats to save on conversion costs.

• High Discounts to attract Low and Middle-income Consumers: By keeping costs low, ROST can offer a variety of brand-name and in-season off-price merchandise at large discounts to compete with general retailers.

The above chart shows a breakdown of ROST's net sales in FY2007 by product category. Together, Ladies' Apparel and Home Products made up more than 50% of sales in FY2007. ^[2]

With store locations in the U.S. and Guam, ROST operates two chains of discount retail stores, targeting households with different levels of income. The two chains include:

• Ross Dress for Less markets heavily discounted apparel, accessories, shoes, and home merchandise for adult men and women from middle-income households. Compared to department and name-brand specialty retailers, Ross Dress for Less offers discounts of 20~60% below regular retail prices. ^[2]

• DD's Discounts sells similar off-price merchandise as Ross Dress for Less, but at a larger discount to attract consumers from modest income families. These stores often price at 20 to 70% below regular retail price. ^[2]

[edit] Business Financials

[edit] FY2007 (Ended Feb. 2, 2008)

• At the end of 2007, ROST operated 890 stores, a net increase of 93 stores when compared to 797 stores at the end of 2006. ^[2]

• In FY2007, net sales was $6.0 billion, an increase of 7.3% from $5.6 billion in FY2006. The net sales increase was primarily due to the increase in new stores FY2006 . ^[2]

• Comparable store sales increased 1.0% in FY2007 for stores that have been opened 14 months or more, and sales per retail square footage held steady at $301 in 2007, similar to that of 2006. ^[3]

• Operating margins were steady at 7.1%, or $425 million, in FY2007. This was mainly due to the expansion of stores in terms of brand variety within product categories while holding the product mix offered in stores fairly constant. ^[2]

• Net income increased 7.9% from FY2006, totaling $261 million, or 4.4% of net sales revenue. ^[4]

• ROST's net earnings grew at a CAGR of 15.6% from FY2004 to FY2007. ^[2]

The above chart shows a comparison of ROST's net income and sales revenue from FY2004 to FY2007. Net income was 4.4% of sales in FY2007, and the drop in comparable store growth in FY2007 was due to . ^[3]

[edit] Trends and Forces

[edit] Economic Downturn and Weak Retail Generates Larger Supply of Closeout Merchandise

In December 2008 the National Bureau of Economic Research reported that the U.S. economy had been in a recession since December 2007.^[5] The recession was spurred by the 2008 Financial Crisis and has resulted in a significant decline in consumer spending, which has hurt retail sales. In November 2008, total retail sales fell 5.5% in the U.S.^[6]

As the weak 2008 holiday season ended, many general retailers were left with excess inventory; additionally, recently-bankrupt retailers are entering the liquidiation phase of their merchandise stock. Both are highly advantageous for ROST, which relies on finding sources of closeout merchandise from brand-name retailers to maintain its store inventory of discounted goods. Furthermore, as general retailers and bankrupt companies are eager to clear out excess merchandise, ROST may be able to purchase closeout merchandise at lower prices, reducing cost and increasing profit margins. ^[7]

[edit] Consumers Look to Discount Retailers during Economic Downturns

ROST targets the price-conscious middle-class segment of the retail market, since it sells brand-name items preferred by middle-class consumers at a heavy discount. The business model especially appeals to more middle-class consumers during the U.S. Economic Cycles as consumers become more thrifty during the recession but still want to maintain the quality of merchandise they purchase. Due to its appeal as a discounted retailer of brand name products, ROST will be able to offset negative pressures on its sales and earnings during the recession with its appeal to price-conscious consumers by gaining market share. ^[8]

[edit] ROST Faces Strong Competition that Limits Expansion Opportunities

ROST has been proactive in acquiring a number of former Albertson’s locations, working to expand into different geographic markets in the U.S, since currently over half of all ROST locations are in 3 states (CA (28%), TX (14%), and FL(12%). ^[2]. However, ROST will face stiff competition in the Northeast and Mid-Atlantic markets, where competitors TJX Companies (TJX), Marshall's, and Kohl's (KSS) maintain dominance.

[edit] ROST Paid Heavy Settlement Charges and Likely to Incur Future Litigation

Due to negligence by ROST to comply with governmental regulations about printing credit card numbers on receipts, the company settled a class action lawsuit in February 2009 for an undisclosed amount. (Around one million customers were eligible to make a claim for compensation from the settlement in this case, McGee vs. Ross Stores.) ^[9] In its strategic business choices to cut operating costs, ROST has focused to cut labor costs through leaner operations and more self-service styled stores, with fewer staff on maintenance and operations. ROST's negligence stemmed from this lack of supervision in its operations due to low-cost strategies, which points to the high probability that other cases of negligence or legal violations will occur in its stores. ^[10]

[edit] Competition

Ross faces direct competition in the off-price retail market, as well as from department and discount retailers. ROST is the second-largest off-price retailer, with $5.9 billion in sales in 2007, behind TJX Companies (TJX), the segment leader with $18.6 billion in 2007 sales.^[11]

Competitors include:

• TJX Companies (TJX), which includes brands such as Marshall’s and TJ Maxx, and is the current market leader for domestic off-price retail. TJX has store locations throughout the US, as well as Canada, Ireland, the UK, and Puerto Rico. Over half of total 2007 sales came from the Northeast and the South.^[12]

• Retail Ventures (RVI) includes off-price retailers such as the upscale off-price brand Filene’s Basement and the off-price shoe specialty brand DSW (DSW). RVI is based largely in the East and Midwest, though DSW has a presence in California and Texas, and in 2007 reported total sales of $1.8 billion. ^[13]

• Men's Wearhouse (MW), an off-price menswear retailer, which also includes the value brand K&G. Men's Wearhouse has locations in 45 states, as well as throughout Canada under the Moores brand. MW reported $2.1 billion in 2007 sales.^[14]

• Department stores, such as Macy's Inc. (M), Kohl's (KSS), and Sears (SHLD), who can reduce the perceived value of off-price retail through promotions and seasonal sales.
• Discount retailers such as Target (TGT) and Wal-Mart (WMT), who compete most directly with Ross by utilizing private labels to provide value apparel offerings.

1. ↑ ROST 2006 Annual Report
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9} ROST SEC Filing 10-K, FY2008
3. ↑ ^{3.0 3.1}
4. ↑ ^{4.0 4.1} ROST Income Statement and Balance Sheet, FY2007, Google Finance
5. ↑ Recession is Official in December 2007
6. ↑ WSJ.com, Retail Sales November 2008
7. ↑ US Retail Slashes Inventory
8. ↑ Cheap is the New Black for Retail
9. ↑ Thousands Received Checks in the Easy to Claim McGee vs. Ross Stores Class Action Settlement
10. ↑ Class Action Lawsuit Settlement
11. ↑ TJX 2006 Annual Report
12. ↑ TJX Company Profile, Reuters
13. ↑ RVI Sells Stake in Value City
14. ↑ MW Annual Report
15. ↑ TJX Income Statement, Google Finance
16. ↑ MW Income Statement, Google Finance
17. ↑ RVI Income Statement, Google Finance