Ross Stores, Inc. ( NASDAQ:ROST) is America’s second-largest off-price retailer [1], behind competitor TJX Companies. It operates 771 Ross Dress For Less stores in the U.S. and Guam, as well as 26 dd’s Discounts stores, targeted at a lower-income consumer bracket, in California. The company's retail outlets are regionally concentrated in California, Texas and Florida, making its operating results highly dependent on these local economies. In addition, the off-price retailer sources much of its sales from middle- and lower-income demographies, who are more sensitive to overall economic cycles and would decrease retail spending faced with macro-economic pressures such as rising energy costs.
The off-price retail sector has done well in recent years, growing at a CAGR over 10% compared to 4% for apparel retail overall. However, Ross has not been able to take advantage of this trends as difficulties in expansion and operational missteps during 2004 and 2005 dropped operating margins and same store sales (both closely-watched retail industry metrics). While the turnaround is well underway for Ross, the company has still not completely returned to its pre-2004 performance.
[edit] Company Overview
Ross and other off-price retailers purchase retail merchandise directly from suppliers, taking advantage of manufacture overruns and canceled orders to acquire retail goods at an opportunistic discount. They also utilize “packaway”, items purchased at discount at the end of a season, then held in inventory until the next appropriate season for sale. Ross also has lower operating costs than department stores, due to a more self-service store format and centralized merchandising decisions. Ross stores carry fewer types of retail items than department stores, but have expanded offerings in recent years to include maternity wear, small furniture, gourmet cookware, and jewelry.
ROST Sales Mix[2]
|
| 2004
| 2005
| 2006
|
| Ladies
| 34%
| 34%
| 33%
|
| Home/Bed & Bath
| 21%
| 21%
| 22%
|
| Men's
| 16%
| 16%
| 15%
|
| Lingerie/Accessories/Fragrances
| 12%
| 11%
| 11%
|
| Shoes
| 8%
| 9%
| 10%
|
| Children's
| 9%
| 9%
| 9%
|
ROST Operating Information (Fiscal Year)[3]
|
| 2002
| 2003
| 2004
| 2005
| 2006
|
| Total Sales (millions)
| $3,531
| $3,921
| $4,240
| $4,944
| $5,570
|
| Year-over-year Sales Growth
| -
| 11.0%
| 8.1%
| 16.6%
| 12.7%
|
| Operating Margin
| 9.3%
| 9.5%
| 6.6%
| 6.6%
| 7.2%
|
| Same Store Sales Increase
| 7%
| 1%
| -1%
| 6%
| 4%
|
| Sales per Square Foot
| $316
| $312
| $297
| $304
| $305
|
[edit] Trends and Forces
- Off-Price Retail Growing Fast: The off-price retail sector as a whole is growing faster than most other retail segments, with a CAGR greater than 10% over the past five years, well above the 4% average annual growth rate for apparel retail. However, Ross has been unable to take advantage of this trend, despite being the number 2 player in this retail segment. Execution missteps in 2004 and 2005, involving faulty integration of new distribution and inventory systems as well as internal and external shrink, caused operating margins to fall from consistently above 9%, to 6.6% in 2004.[4] Expansion difficulties and underperforming stores in new markets have also caused a recent hit in sales per square foot and same store sales. These figures have begun to recover as Ross fixed execution errors and reevaluated expansion plans; however, they have yet to return to their previous level of performance in terms of operating margin efficiency.
- Expansion Difficulties: Ross has been proactive in acquiring a number of former Albertson’s locations, taking advantage of more flexible store layout criteria to expand without requiring new construction. However, Ross has been slow to roll out their dd’s Discounts concept—targeted at a lower-income consumer bracket—with all current locations in California only. The company has also had difficulty breaking into the Northeast and Mid-Atlantic markets, where competitor TJX Companies (TJX) maintains dominance, as well as the Midwest, which is controlled by a number of competitors such as Kohl's (KSS).
- Regional Concentration in CA, TX and FL: Currently, over half of all Ross locations are in three states: California (28%), Texas (14%), and Florida (12%). California is also home to Ross corporate headquarters, two distribution centers, and all current dd’s Discounts locations. This lack of diversification makes Ross more susceptible than their rivals to localized factors, such as natural disasters, higher energy costs, and real estate issues (with California and Florida among the leading states in foreclosures).
- Dependent on Low- and Middle-Income Consumers: Ross targets lower- and middle-class consumers, who are more economically sensitive to factors such as rising energy costs and interest rates. ROST's concentration in states such as California, as mentioned above, further increases their exposure to decreased consumer spending. While Ross's off-price value model may attract customers looking to save money, it is unclear whether this would offset an overall drop in discretionary spending. The retail industry as a whole is also particularly sensitive to higher energy costs (due to a high number of deliveries) and the rising federal minimum wage.
[edit] 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 $5.6 billion in sales in 2006, behind TJX Companies (TJX), the segment leader with $17.4 billion in 2006 sales.[5]
Competitors include:
- TJX Companies (TJX), which includes brands such as Marshall’s and TJ Maxx, and is the current 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 2006 sales came from the Northeast and the South.[6]
- Retail Ventures (RVI), which includes off-price retailer Value City, upscale off-price brand Filene’s Basement, and 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 2006 reported total sales of $3.1 billion.[7]
- 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 $1.9 billion in 2006 sales.[8]
- Stein Mart (SMRT), which positions itself as a cross between a specialty store and an off-price retailer, and targets mostly women with above-average incomes. Stein Mart is focused in the South and Midwest, and reported $1.5 billion in 2006 sales.[9]
- 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.
- ↑ ROST 2006 Annual Report
- ↑ ROST 2006 Annual Report
- ↑ ROST 2006 Annual Report
- ↑ ROST 2006 Annual Report
- ↑ TJX 2006 Annual Report
- ↑ TJX 2006 Annual Report
- ↑ RVI Annual Report
- ↑ MW Annual Report
- ↑ SMRT Annual Report
2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available
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