Ross' Plans are Paying Off
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Today Ross (NASDAQ: ROST) shares jumped 7 percent after the discounter's June sales rose while other clothing stores didn't meet analysts' expectations. I checked Ross' annual report to see what this discounter was doing right, and found that Ross' expansion plans could help this retailer report solid gains later in the year as well. With fewer stores than TJX (NYSE: TJX), Ross looks like it has some room to add stores in other parts of the country, and Ross' dd's discounts stores also look promising.
Ross started in California, and it has also established a strong presence in several large markets throughout the United States, including Texas and Florida. Although Ross has added a few stores in lower population western states and the Southeast, it hadn't started expanding into the Midwest until late 2011. The map in its 2011 annual report shows that Ross also avoided New York and many Northeastern states.
TJX' revenue figures show what expanding into the Midwest and the Northeast could do for Ross' sales. TJX gets 39 percent of its revenue from its stores in the South and the West, Ross' main markets, while making 37 percent of its sales in the Midwest and the Northeast. The other 24 percent of TJX' sales come from Canada and Europe. TJX seems prepared to add more overseas stores, although Ross seems like it plans to expand within the United States for now.
Adding these new stores will be expensive for Ross, although the company thinks that it can cover its expansion costs with its operating cash flow. Both TJX and Ross have enough cash flow to keep adding stores without taking out loans, although Ross' annual report does show a drawdown in its cash balance, from $834 million at the end of 2010 to $650 million at the end of 2011. Ross did announce that it expected to add stores in 2012 without reducing its cash reserves further. Midway through 2012, it looks like Ross' forecast was right, as its cash balance has improved to $742 million even after it added more stores.
Ross' balance sheet also shows some good trends. Even after stocking up with more inventory and adding more stores, its return on assets still rose to 20 percent for fiscal 2011, and its return on assets figure has now increased for five years in a row -- return on assets was 11 percent in 2007. This figure suggests that Ross has become more efficient, even though new clothing stores don't always reach the sales figures of established stores immediately.
Ross also seems well prepared for one of the biggest risks to any discounter, the dollar stores, which can undercut even lower-end retailers. Even a sizable discount on department store clothing might not be enough for a shopper with a limited budget. Tanya Mannes, at U-T San Diego, reports that dd's discounts stores offer clothing that's more typically seen at Wal-Mart (NYSE: WMT) and other value retailers, and the dd's discounts stores are also slightly smaller than the Ross Dress for Less big boxes.
The 12 stores Ross added in Chicago were Ross Dress for Less stores, Ross' original store brand. Competing on price with traditional department stores seems much easier than competing on price with Wal-Mart, although Ross has been rolling out its dd's discounts stores successfully so far. Wal-Mart's stock also rose today after it reported that its sales improved in June, which shows that Wal-Mart, Ross, and TJX are all attracting shoppers looking for discounts.
Ross will also have to compete with Wal-Mart in Chicago. Corilyn Shropshire, at the Chicago Tribune, reported that Wal-Mart plans to add a few Neighborhood Market grocery stores in the Chicago area. Although Neighborhood Markets mostly sell groceries and basic convenience items, Wal-Mart has two supercenters in Chicago as well -- the second Chicago supercenter opened in January, and Jason Knowles at ABC News, reported that it plans to open another in 2013.
Ross still has room to grow in the United States, so it doesn't need to open stores in Europe to grow like Wal-Mart and TJX have done. The dd's discounts stores both offer growth prospects for Ross and protect Ross from other deep discounters. Ross does have a forward P/E of 17.7, which is higher than TJX' 16.3 figure or Wal-Mart's 13.3 figure. Paying a premium for Ross right now seems reasonable, as it looks like Ross' strategy is working.
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