Ross Chalks Up Quarter With Brand Name Values


Many of the nation's retailers would probably like to pretend this year's first quarter never happened.

Unseasonably cold weather, payroll tax increases at the start of the year and delayed tax refunds were among the head winds that led to weak sales, broader markdowns, and slow earnings growth at many chains.

"It was a tough quarter for a broad swath of retailers," said Ken Perkins, president of Retail Metrics.

Fifty-four out of the 117 retailers that reported through June 12 saw year-to-year earnings decline for the quarter, he says. Average retail earnings growth was just 5% vs. a year earlier, says Perkins. Revenue edged up only 2.1%. Same-store store sales barely eked out a gain of 0.2%.

But off-price retailerRoss Stores ( ROST ) stayed on the fast track during the tough quarter with solid results that outpaced the industry average. Earnings climbed 15% to $1.07 a share, it reported May 23. It marked the 17th straight quarter of double-digit profit growth.

Net earnings grew 12% to $234.6 million. Revenue rose 8% to $2.35 billion.

Same-store sales grew 3% vs. a year earlier. That compares with a robust 9% gain in comps in the 2012 first quarter.

Ross boasts a value proposition that continues to lure deal-hungry consumers. It sells in-season, brand-name and designer clothes, accessories, footwear and home fashions at 20% to 60% off department and specialty store regular prices.

Business Model

"It's a great model and very appealing to a broad swath of consumers, who still want to be able to buy name brands but can't afford to pay department store prices," said Perkins.

The quest for value is stronger than ever, adds Avondale Partners analyst Mark Montagna. And Ross delivers the kind of value consumers are looking for, with name brands at a discount and a constant flow of new merchandise, he says.

If there's one thing consumers learned during the recession, it's how to get more bang for the buck. They continue to apply that lesson, even in today's economy.

"Consumers are still spending more cautiously," added Morningstar analyst Jaime Katz. "All off-price locations are growing faster than the full-price retail channel."

Another off-price retail operator,TJX Cos. ( TJX ) has also been enjoying a nice run with a steady stream of double-digit profit growth. That includes the first quarter, when the operator of T.J. Maxx, Marshalls and HomeGoods stores saw profits rise 13%. Like Ross, TJX has struck a chord with the consumer with its discounts on name brands.

Ross operates Ross Dress for Less, the largest off-price apparel and home fashion chain in the U.S. with 1,112 locations in 33 states, D.C. and Guam. It also runs 115 dd's Discounts stores in nine states that feature a more moderately priced assortment of the same merchandise.

Ross had weather on its side during the first quarter compared to other retailers, says Perkins. Most of its stores are based in the South and the West where the weather was relatively warm and dry, he adds, compared to the Northeast and Midwest where the weather was unseasonably cold.

The company also benefited from internal efforts during the quarter, including keeping inventory lean. As the company ended the first quarter, total consolidated inventories were up about 8% compared with the prior year with average in-store inventories down about 3%.

Ross and dd's Discounts sales and profits continued to benefit from the company's ability to flow a larger percentage of fresh merchandise to stores by operating with lower inventory levels, said Co-President Michael O'Sullivan on the conference call.

One area of opportunity for Ross is the home decor category, he says. He says the strength in the home category for off-price retailers is driven by demand for home goods at full-price retailers. And that demand has been up amid an improving housing market.

But Ross has had some issues in its home-related business with merchandising that hasn't been on target, he says.

The company has moved to fix the problem: "We actually feel good about the progress that we're making in home," said O'Sullivan on the conference call. "As we came into the year, we had a plan to strengthen assortments in the home business and that plan is on track."

Overall, says Montagna, Ross continues to benefit from what it's been doing for years, which is selling brand-name products at value prices. Ross' low prices are helping the retailer fend off competition from online rivals.

Immune To Showrooming

Montagna says Ross is nearly "immune" to "showrooming" based on his survey of 100 items at Ross stores. Showrooming is the process of using brick-and-mortar stores to browse, test, and price-check items before buying the same items online.

In the survey, 81 of 100 items at Ross stores could not be found using the Google Shopper app. Of the 19 items found, Ross's retail store prices were lower on 16 items vs. online competition. Of the 19 items that produced a match, Ross' prices were 31% lower on average.

"This showrooming immunity provides a moat around each store to further ensure consistent sales and margin growth," Montagna wrote in a report.

Analysts polled by Thomson Reuters expect Ross to continue to see solid growth. They see second-quarter earnings growing 15% to 93 cents a share.

They forecast full-year earnings will be up 10% to $3.88 a share. That would be a slower pace than the 23% growth it saw last year and the year before. But that's a tough comparison to top.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: ROST , TJX

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