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WIKI ANALYSIS
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. 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.
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 clothes but at a much lower cost. A growing economy means that consumers are more willing to spend on discretionary goods and are willing to spend more money on higher quality items. ROST's bottom line will be negatively impacted if it cannot maintain its customer base.
Company Overview
Ross Stores 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:
- Ladies: 25% of net sales
- Home Accents and Bed & Bath: 24% of net sales
- Men's: 13% of net sales
- Accessories, Lingerie, Fine Jewelry, and Fragrances: 13% of net sales
- Shoes: 9% of net sales
- Children's: 9% of net sales
Business Growth
FY 2010 (ended January 30, 2011)[1]
- Net sales increased 9.5% to $7.8 billion.
- Net income increased 25% to $554 million.
Trends and Forces
ROST Faces Challenges As Economy Turns Around
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 is preferred by middle-class consumers. During the economic downturn the company's business model appealed more to middle-class consumers as they became more price conscious but still wanted to maintain the quality of merchandise they purchased. Consequently, Ross Stores and many other discount retailers thrived during this period.
ROST faces new challenges as the economy begins to rebound. Its main challenge is keeping the price conscious middle-class customers it has gained during the recession. As the economy emerges from the recession, these middle-class consumers won't be as hesitant to spend money on discretionary goods and won't look to sacrifice quality for price. As a result, there is a tendency that these consumers will leave the discount retailers in favor of normal retailers or even luxury retailers. If this happens, ROST's bottom line will be negatively impacted as a result of fewer customers in stores.
Economic Downturn and Weak Retail Generates Larger Supply of Closeout Merchandise
Many retail stores struggle getting merchandise off store shelves during tough economic times. As a result, many retail stores were left with excess inventory. Additionally, bankrupt retailers, like Linens n' Things, entered the liquidation phase looking to get rid of merchandise by any means necessary. Both of these occurrences were 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 were eager to clear out excess merchandise, ROST was able to purchase closeout merchandise at lower prices than usual, reducing cost and increasing profit margins.
Much of store's appeal comes from its ability to acquire a large and a variety of quality items. However as the economy begins to rebound, there will be fewer struggling general retailers needing help to clear inventory and fewer companies entering liquidation. As this happens, ROST will not be able to obtain items at the price and level it did during the recession. A smaller selection of quality items to choose from would turn potential customers away.
Competition
Ross faces direct competition in the off-price retail market, as well as from department and discount retailers. 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.
- 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.
- 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.
- 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.
References
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