Ross’ results are enabled by its strong merchandising and inventory management, allowing a fast-changing assortment of opportunistically sourced items

Business Strategy and Outlook

With a fast-turning inventory of high-value branded merchandise, Ross’ store experience and value proposition should continue to resonate as the pandemic ebbs. Ross weathered a number of challenges in 2021, with a difficult environment for experience-oriented physical retail, inflation, supply chain disruptions, and volatile case counts eased by economic stimulus, continued strength in home décor categories, and the start of Americans’ post-pandemic wardrobe rebuild. The current situation is unprecedented, but off-price retailers have not been derailed by past recessions; Ross’ comparable sales grew by 2% and 6% in fiscal 2008 and 2009, respectively. Ross’ results are enabled by its strong merchandising and inventory management, allowing a fast-changing assortment of opportunistically sourced items. It aims to be a partner of choice for vendors looking to sell excess items, accepting incomplete assortments without return privileges, paying promptly, and stocking brands discreetly (allowing them to avoid creating pricing pressure in the full-price channel that can ensue if their labels are viewed as a constant discount option). This flexibility is a product of the treasure-hunt shopping experience and Ross’ distribution and merchandising agility.

Ross has long enjoyed ample availability of attractively priced products, which is expected to persist. Mutable tastes, the proliferation of alternative distribution channels, and inherent demand variability due to unpredictable external factors (exacerbated by full-price store closures during the pandemic), should leave room for off-price retailers to source products attractively, capitalizing on their vendor relationships and ability to offer favourable terms. While competition is fierce and digital rivals are building a presence in Ross’ core categories, its low-frills shopping experience and significant discounts (around 20%-70%) result in competitive prices and superior economics after considering shipping and return costs. The pandemic should increase e-commerce adoption long term, but the full-price sellers will have to bear most of the shift.

Financial Strength

With nearly $5 billion in cash at the end of fiscal 2021 against less than $2.5 billion in debt, Ross’s clean balance sheet affords considerable flexibility. It is expected that annual adjusted EBITDA will cover interest expense at least 40 times in any given year over the next decade. Combined with free cash flow to the firm averaging around 8% of sales over the long term, Ross will fund its continued expansion goals internally once conditions normalize. Ross is expected to grow toward its 3,600-unit footprint target over the next 10 years (from 1,923 at the end of fiscal 2021). While expansion should remain its capital priority, it should continue to favour leasing stores. Capital expenditures should average around 3%-4% of sales long term, near fiscal 2019’s pre-pandemic 3.5%. The firm will continue to look to return excess capital to shareholders via share buybacks and dividends. Ross’ dividend rises over time as cash generation increases, at a long-term payout ratio of around 30%, slightly higher than fiscal 2021’s 23% mark. It is expected Ross to use 60% of its annual operating cash flow to repurchase shares by the end of the explicit forecast. Alternatively, the firm could pursue acquisitions of regional chains or other concepts (including operations outside the United States) to accelerate its growth.

Bulls Say’s

Ross should be relatively well-insulated against digital rivals, considering its differentiated store experience and operational efficiency (which fuels its competitive prices).

Its treasure-hunt shopping experience, agile supply chain and distribution network, and merchandising strength maximize Ross’ flexibility while holding inventory levels in check, minimizing risk while freeing capital.

Other physical retailers’ downsizing should lead to an ample supply of attractively located, well-priced storefronts that should fuel Ross’ expansion

Company Profile

Ross Stores is a leading American off-price apparel and home fashion retailer, operating over 1,920 stores (at the end of fiscal 2021) across the Ross Dress for Less and dd’s Discounts banners. Ross offers a variety of name-brand products and targets undercutting conventional retailers’ regular prices by 20%-70%. The company uses an opportunistic, flexible merchandising approach; together with a relatively low-frills shopping environment centred on a treasure-hunt experience, Ross maximizes inventory turnover and traffic, enabling its low-price approach. In fiscal 2021, 26% of sales came from home accents (including bed and bath), 25% from the ladies’ department, 14% from each of men’s and accessories, 12% from shoes and 9% from children. All sales were made in the United States.

(Source: MorningStar)

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