We also purchased shares of Ross Stores (NASDAQ:ROST) during the quarter. Ross is the other uniquely profitable off-price retailer, with nearly 1500 locations in 34 US states. Like TJX, we think Ross’s value chain is tailored to deliver a “more for less” value proposition for its customers. However, unlike TJX, Ross skews to a much more moderate income buyer who is looking to find “value” more than fashion. We find evidence that Ross’s catering to this demographic requires substantially different investment and operational activities. For instance, nearly half of Ross’s inventory is “packaway” inventory, which is typically more fashion-oriented merchandise that was purchased from vendors and kept in storage, to be deployed to store floors at a later date (sometimes the following season, but rarely more than a year). In the meantime, the “flow” that makes up most of Ross’s turnover consists of less well-known fashion brands but at price points that still represent great value relative to full-price retailers. In contrast, we do not think TJX has a meaningful packaway strategy, instead tailoring their merchandise flow to be fashion- oriented most, if not all, of the time. Further, Ross operates a very moderate priced concept, DD’s Discount, with average unit retail (i.e., the price of an item at checkout) closer to dollar stores, which is about half the price of our estimate for TJX’s average unit retail.
We expect Ross to continue investing and expanding its core Ross Stores concepts and DD’s Discount stores across the U.S., as well as eventually enter into international markets, with room to double their existing footprint. Along with a multi-decade history of routinely positive comparable store sales, we expect that Ross’s growing footprint should lead to healthy high-single-digit revenue growth, while margin expansion and buybacks help drive mid-teen EPS growth.
From David Rolfe (Trades, Portfolio)'s second quarter 2016 Wedgewood Partners Client Letter.
