Ross Stores (ROST, Financial) is one of the leading off-price retailers of apparel and home fashion goods in the U.S. The retailer’s Ross Dress for Less stores sell its products at everyday savings of 20% to 60% off department and specialty store regular prices and dd’s DISCOUNT stores sell its products at everyday savings of 20% to 70% off moderate department and discount store’s regular prices.
The off-price retailer started fiscal 2015 on a positive note by posting estimate-beating first-quarter results last week. Comparable-store sales, or comps, jumped 5% year over year. This, in combination with new store addition, fueled 9.6% year-over-year growth in sales to clock $2,938.1 million, beating estimates by $50 million. On the back of solid sales growth, earnings grew 19.1% year over year to $1.37 per share, beating estimates by $0.05 per share.
Competition is heating up
Competition in off-price retail market is heating up as many more retailers are entering into this sector, since it has been performing well. For example, according to a report from NPD group, the five largest off-price retailers in the U.S. notched 6% increase in sales during 2013, versus a meager 1% gain from national apparel sales overall.
Also, according to a Moody’s report, “The three largest off-price retailers – TJX (TJX, Financial), Ross Stores, and Burlington (BURL, Financial) – will see above-average growth, in the 6%-8% range, over the next five years, compared with 4% growth for the broader retail industry.”
Macy’s (M, Financial) will be opening its first four test stores this fall in New York City and the surrounding area, and it will be called Macy’s Backstage. With this, the company will be formally entering the off-price retail market. These pilot discount stores will offer clearance goods from Macy's as well as special buys.
In addition, Kohl’s (KSS, Financial) is testing an off-price concept with a pilot “Off Aisle by Kohl’s” store that will open in Cherry Hill, NJ. This is in pilot phase and will feature returns from Kohl’s stores or its website offered at highly discounted prices.
Ross is ready to flex its muscle
To a question during the conference call on Macy’s and Kohl’s entry into off-price retail, Michael J. Hartshorn, Senior VP, Chief Financial & Accounting Officer, said:
"If they want to grow the share of the off-price segment probably at the expense of other retail formats, that would be fine. But we actually have – we think we have quite a strong skill set and set of capabilities that put us in a pretty strong position, and we've always operated in a very competitive environment. We never take the customer for granted and we know that if we can execute well on our price model and deliver great bargain to the customer, we'll do well no matter who the competition is."
During the quarter, Ross opened 32 namesake and 5 dd’s DISCOUNT stores. In fiscal 2015, Ross will be opening 70 Ross and 20 dd’s DISCOUNT stores, besides relocating or shuttering 10 stores. During the first quarter fiscal 2015, both Ross and dd’s performed above expectations.
With competition getting stiff, there will be lot of promotional activity going on, in fact more than expected as evident from the statement of COO Michael Sullivan during conference call:
"You see that and you get a sense of that in the recent results that have been announced by other retailers. Actually that feeds into a second concern which is those results themselves may cause the environment to become more promotional over the next few months."
To drive bottom-line growth, Ross is on target to repurchase $700 million worth shares during the fiscal year. The top-line growth is being ensured by aggressive opening of new stores, social media promotion, and positive response from value-focused customers toward the company’s extensive collection of brand bargains.
Wrapping up
Buoyed by strong first-quarter performance, Ross upped its guidance for fiscal 2015. The off-price retailer now expects earnings per share in the range of $4.72–$4.87 for fiscal 2015, up from $4.60–$4.80 expected earlier. On a split-adjusted basis, this works out to $2.36–$2.44 per share, representing 7%-10% year-over-year earnings growth. For the second-quarter, comps are expected to increase in the range of 2%-3%, sales in the range of 6%-7%, and earnings per share in the range of $1.19–$1.24 per share.
For the next five years, analysts predict compound annual growth rate of 12.13%. Relatively weaker comps guidance for second-quarter has lead to a pullback in stock price, and this should be seen as an opportunity to buy the stock.
