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Patricio Kehoe
Patricio Kehoe
Articles (164) 

Narrow Moat and a Favorable Economic Environment Drives Growth for Off-Price Retailer

February 10, 2014 | About:

Recession has been an excellent ally for Ross Stores Inc. (NASDAQ:ROST). This North American off-price apparel and home fashion retailer achieved a same store sales increase of 6% in 2012, while the rest of the department stores suffered on average a 5% decline in comps during the same period. Reasons for this success come at hand when we think about the economic environment. A slow recovery continues to pare customer`s discretionary spending and buyers have moved from full-priced stores to those that offer same-brand products at lower prices. With the company offering brand-name and designer products with discounts between 20% and 60% at Ross' Dress for Less stores, and up to 70% lower prices at its dd's DISCOUNT locations, the increase of its customer base comes as no surprise.

Strong Growth Potential

Ross is one of the largest off-price retailers in the U.S., with 1,131 locations. And the firm states that the market can uphold a doubling of the current store count. Quick inventory turnovers support this idea and the company increased its long-term store growth target to 2,500 locations. Thus, management is driving square footage growth by about 6% to 7% annually to maintain its current pace of opening 70 stores per year. This business scale is hard to attain and there are few players competing. The company`s largest rival is TJX Companies Inc. (NYSE:TJX) which operates 3,100 stores worldwide under the T.J. Maxx, Marshalls, HomeGoods, Winners, HomeSense, T.K. Maxx and Sierra Trading Post trademarks. Nevertheless, Ross is the largest single brand in the U.S.

Strategic Buying, Distribution and Inventory Management

Ross' business scale comprises an impressive buying fleet of about 600 merchants. The team seeks attractively discounted designer items and the season`s hottest trends among more than 8,000 vendors. The firm also boasts four distribution processing facilities and two more in the pipeline, where merchandise is separated according to local preferences. In this manner, it can provide each store with the right assortment at the right time, managing costs in an efficient way. Moreover, the company owns five warehouse facilities where it stores designer staples bought at season`s end to be sold in the next. In addition, Ross benefits from low prices in the acquisition of suppliers' excess inventory due to the general sales drop in the market.

The high effectiveness of its management enabled the firm to achieve well-adjusted inventory levels and faster inventory turns. As a result, the company keeps strong merchandise margins by means of reducing the need for end-of-the-season markdowns as well as increasing its customers´ visits to check on new products.

A Solid Long-Term Performance

Built mainly on cost advantages, Ross has posted flat or positive comps growth since the beginning of 2008, with the exception of one quarter. The last three years have reported an annual increase of same-store sales of 5% to 6%. And the firm is continuously broadening its brand portfolio and fine-tunning its buying operations in order to offer the best assortment of products while keeping high profit margins.

Over the last three years, revenues grew an annual 11% midpoint and the return on invested capital raised an average of 22%. Ross` stock trades at 17.70 its trailing earnings, compared to the industry median of 18.20, and it pays a dividend yield of 0.98 with its rivals averaging 1.97. The company`s return on equity is a high 44.50 compared to a 9.10 average for its peers and its return on capital 85.20 against a much lower 19.10 for the industry average. Hence, although investment guru Scott Black (Trades, Portfolio) recently reduced his holdings by 8.71% I feel strongly bullish about Rosss performance in the long term.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 4.0/5 (4 votes)


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