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ROST AT A GLANCE

P/E ► 16.7 AVG EV/EBITDA ► 8.96 AVG ROA ► 13.9% HIGH ROE ► 33.7% HIGH Debt to Equity ► 1.43 AVG Current Ratio ► 1.42 LOW Interest Coverage Ratio ► 178 HIGH

 

 

 

 

 

 

Ross Stores, Inc. (NASDAQ:ROST) is the second-largest off-price retailer in the United States, in terms of total sales, behind competitor TJX Companies.^[1][2] ROST operates two chains: Ross Dress for Less (Ross) and dd's Discounts, both of which sell apparel, accessories, footwear, and home fashion products. The company's chains are best known for having daily discounts of 20% - 70% off regular discount store prices; this is possible because ROST is a closeout retailer, meaning that it buys products directly from merchandise vendors and manufacuturers at very low prices due to shifts in supply and demand for products, manufacturer overruns, and canceled orders. Because these products are bought at such low prices, the company is able to sell them at steep discounts compared to normal discount store competitors. At the end of FY 2008, ROST operated 956 stores in 27 states and Guam -- 904 were Ross stores and 52 were dd's Discounts stores.^[3] The company generated $6.5 billion in revenue in 2008, well below the $19 billion that its main competitor TJX Companies generated.^[4][5]

Like most other off-price retailers, ROST has done well during the 2008 recession and the weak retail environment.^[6] The company targets price-conscious middle class consumers and consumers from the lower-income brackets who during recessions look to save money and focus more on value. Because ROST has made it one of its business priorities to provide customers with plenty of brand-named and designer merchandise, thrift-minded consumers can still buy their favorite close but at a much lower cost. In 2008, net sales and comparable store sales were up 8.6% and 2% respectively.^[4] The growth has continued into 2009 as well with the company reporting an 7.9% increase in net sales for the first quarter.^[7]

Company Overview

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 over time to include things like maternity wear, small furniture, gourmet cookware, and jewelry.

Business Segments

The company reports its sales in six major business segments:^[8]

• Ladies: 32% of net sales
• Home Accents and Bed & Bath: 23% of net sales
• Men's: 14% of net sales
• Accessories, Lingerie, Fine Jewelry, and Fragrances: 12% of net sales
• Shoes: 10% of net sales
• Children's: 9% of net sales

Sales of women's products (including the sales of accessories, lingerie, jewelry, and fragrances) account for nearly half (44%) of the company's total sales.^[8]

Business Drivers

• Low Cost of Goods Sold (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.^[9]

• 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.

Stores

With store 956 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:^[3]

• 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% to 60% below regular retail prices. The company operated 904 Ross stores at the end of 2008.

• 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. The company operated 52 dd's stores at the end of 2008, all of which were located in California, Florida, Texas, and Arizona.

Business Growth

FY 2008 (ended January 31, 2009)^[4]

• Net income increased 16.9% from FY2007, totaling $305 million, or 4.7% of net sales revenue. ROST benefited from the sluggish economy because its off-price business model became more appealing to consumers who were looking to save money while still buying name-brand products. The increase in net sales and comparable store sales were slightly offset by increases in SG&A expenses due to the opening of 66 net new stores and general expenses.

• ROST's, net sales revenue was $6.5 billion, an increase of 8.6% from $6.0 billion in FY2007. The net sales increase was primarily due to the opening of 66 net new stores in 2008 as well as a 2% increase in comparable store sales.

• Comparable store sales increased 2.0% in 2008 for stores that have been opened 14 months or more, and sales per retail square footage decreased to at $298 in 2008, a 1% decrease from 2007.

• Operating margins increased to 7.6%, or $495 million, in 2008. 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.

• At the end of 2007, ROST operated 956 stores, a net increase of 66 stores when compared to 890 stores at the end of 2007.

Q3 2009 (ended October 31, 2009)^[7]

• ROST's net income increased by 83% as compared with the previous year fiscal quarter from $57 million at the end of Q3 2008 to a record $105 million in Q3 2009. The company benefited from its market position as a off-price retailer as recessionary pressures set in and consumer budgets shrank, allowing them to appeal to more price-conscious consumers and thus increasing store traffic and sales.

• The company's net sales increased from $1.55 billion at the end of last year's first quarter to $1.74 billion at the end of the 2009 first quarter, an increase of 12.2%. Increases in sales compared to the previous year were due to the addition of 45 net new stores and a 8% comparable store sales growth.

• Comparable store sales grew 8% at the end of Q2 2009, which was up from 0% in the previous year's quarter.

• Operating margin for Q3 2009 was9.6% of net sales up from 6.0% of net sales in 2008. Operating margin rose despite a 9.1% increase in SG&A expenses.

• At the end of the quarter, the company operated 1008 stores. It operated 963 stores at the finish Q3 2008.

Trends and Forces

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.^[6] The recession was spurred by the 2008 Financial Crisis and has resulted in a significant decline in consumer spending, which has hurt the retail industry. In December 2008, total retail sales fell 2.7% in the U.S., marking the sixth consecutive month of negative sales.^[10] The retail industry's struggles have continued well into 2009 as the industry reported a 4.9% decrease sales decline in June.^[11]

As the recession continues from 2008 to 2009 and as many retail stores continue to struggle getting merchandise off store shelves, many retail stores are left with excess inventory. Additionally, bankrupt retailers, like Linens n' Things, that are entering the liquidation phase are looking to get rid of merchandise by all means necessary. Both of these occurrences 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.^[12]

Consumers Look to Discount Retailers during Economic Downturns

ROST targets not only lower-class consumers but also the price-conscious middle-class segment of the retail market because it sells brand-name items, at heavily discounted prices, which preferred by middle-class consumers. The business model especially appeals to more middle-class consumers during tough economic times as consumers become more thrifty during but still want to maintain the quality of merchandise they purchase. In general, most discount retailers, have either done well or not been hurt too much during the economic struggle.^[13][14] In 2008, ROST's comparable store sales increased by 2% showing that the company is seeing increased traffic. As a result of higher customer traffic, the company had higher net sales and net income in 2008 by 8.6% and 16.9% respectively.^[4]

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%)).^[3] However, ROST faces stiff competition in the Northeast and Mid-Atlantic markets, where competitors TJX Companies (TJX) (TJ Max and Marshall's stores) and Kohl's (KSS) maintain dominance.

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.)^[15] 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.^[16]

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 $6.5 billion in sales in 2008, behind TJX Companies (TJX), the segment leader with $19.0 billion in 2008 sales.^[5]

Competitors include:

• TJX Companies (TJX), which includes brands such as Marshall’s and TJ Maxx, and is the 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 2008 sales came from the Northeast and the South.^[17]

• 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 2008 reported total sales of $1.4 billion.^[18]

• 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 $2.0 billion in 2008 sales.^[19]

• 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 2008 10-K, pg. 3
2. ↑ TJX 2008 10-K, pg. 3
3. ↑ ^{3.0 3.1 3.2} ROST 2008 10-K, pg. 5 and 9
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5} ROST 2008 10-K, pg. 15 and 17
5. ↑ ^{5.0 5.1 5.2} TJX 2008 10-K, pg. F-3
6. ↑ ^{6.0 6.1} Wall Street Journal "Recession Turns Malls Into Ghost Towns" 22 May 2009
7. ↑ ^{7.0 7.1 7.2} ROST Q2 2009 Report, pg. 2 and 14
8. ↑ ^{8.0 8.1} ROST 2008 10-K, pg. 18
9. ↑ ROST 2008 10-K, pg. 4
10. ↑ New York Times "Weak Economy and Retail Sales Hurt Shares" 14 Jan 2009
11. ↑ New York Times "June Is Another Weak Month for U.S. Retail Sales" 9 July 2009
12. ↑ Reuters "U.S. retail cuts helped some inventory companies" 25 Jan 2009
13. ↑ Seeking Alpha "Discount Retailers Thriving in Recession" 7 Jan 2009
14. ↑ CNN Money "Cheap is the new black for retail" 28 Nov 2008
15. ↑ PR Web "Thousands Received Checks in the Easy to Claim McGee vs. Ross Stores Class Action Settlement" 24 Feb 2009
16. ↑ Class Action Lawsuit Settlement
17. ↑ TJX 2008 10-K, pg. 5
18. ↑ ^{18.0 18.1} RVI 2008 10-K, pg. F-5
19. ↑ ^{19.0 19.1} MW 2008 10-K, pg. 19