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Ross Stores, Inc. (ROST), Kohl’s Corporation (KSS): A Quality Retailer With Sustainable Growth

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Ross Stores, Inc. (NASDAQ:ROST) is an off-price apparel and home-fashion retailer in the United States. With discounts as high as 20% to 70% off department-store prices, it’s no wonder that Ross Stores, Inc. (NASDAQ:ROST) has seen success, especially in an economic environment where consumers are so focused on value. However, Ross Stores, Inc. (NASDAQ:ROST) must contend with fierce competition.

Ross Stores, Inc. (NASDAQ:ROST)

Effective strategies

Ross Stores, Inc. (NASDAQ:ROST) has several goals, which include refining existing off-price strategies, maintaining or improving revenue and profitability, and expanding market penetration.

As far as expansion is concerned, Ross Stores, Inc. (NASDAQ:ROST) had 74 new locations in 2012. This, of course, aided top-line growth. However, comps (stores opened at least 14 months) grew 6% during the year, which indicates continuous demand from loyal shoppers. The chart below should give you a clear indication of the company’s consistency.

2010 2011 2012
Sales Growth 9.5% 9.4% 12.9%
Comps 5% 5% 6%
Store Count Growth 5% 7% 7%

Another example of the company’s consistency is the absence of divergences in the sales mix. Ross Stores, Inc. (NASDAQ:ROST) takes advantage of overstocked vendor situations by then offering those goods at large discounts: 20% to 60% at Ross Dress for Less and 20% to 70% at dd’s Discounts. If you’re planning on taking advantage of the latter discount range, don’t get too excited. Currently, there are only 108 dd’s locations in existence, versus 1,091 locations for Ross Dress for Less. However, it’s unlikely that anyone is going to complain about 20% to 60% off department-store prices.

Ross Stores always makes sure it’s offering a broad variety of products. This diversification keeps a wider consumer base interested and helps limit downside potential. Getting to the absence of divergences in sales mix, Ross Stores sells products in several different categories. These groups include ladies (29% of sales); home accents and bed and bath (24% of sales from 25% of sales in 2012); accessories, lingerie, fine jewelry, and fragrances (13% of sales); shoes (13% of sales from 12% of sales); men’s (13% of sales); and children’s (8% of sales).

What stands out here is that the percentage of sales in most categories didn’t change from year to year. Predictable patterns are good to see when you’re looking to invest in retail.

It should be noted that Ross Stores has increased its headcount, while most companies are slashing theirs in order to improve the bottom lines. Of course, the increase is related to its store expansions, but considering the company’s strong balance sheet ($715 million in cash/$150 million in debt), this type of expansion seems to be affordable.

Two other important notes:

  • Diluted EPS for 2010, 2011, and 2012:  $2.31, $2.86, and $3.53, respectively.
  • Ross Stores is currently in the midst of a $1.1 billion stock-buyback program, which is set to end at the end of next year.

Both of the above notes are positive developments for investors.

Playing the industry

Ross Stores has a market cap of $14.8 billion, making it a much smaller player than TJX, with a market cap of approximately $39.1 billion. TJX owns several popular store brands, including T.J. Maxx, Marshalls, and HomeGoods. Thanks to its various store brands and higher total store count (3,000+), TJX is capable of reaching more consumers than Ross Stores. Like Ross Stores, TJX has seen no hiccups on the top or bottom lines over the past several years:

2009 2010 2011 2012 2013
Revenue (in billions) $19.00 $20.29 $21.94 $23.19 $25.88
Diluted EPS $1.00 $1.42 $1.65 $1.93 $2.55

Ross Stores and TJX both currently yield 1.1%, which isn’t quite as high as Kohl’s Corporation (NYSE:KSS) at 2.7%. Kohl’s isn’t an off-price retailer, but thanks to its highly strategic locations combined with its value-product offerings and brand mix, it’s capable of stealing customers from Ross Stores. Actually, Kohl’s Corporation (NYSE:KSS)’s has managed to eliminate many retailers from the arena. Luckily, Ross Stores doesn’t fit into that category. Also, while Kohl’s Corporation (NYSE:KSS)’s has managed to consistently grow its top line, earnings declined in fiscal-year 2013.

2009 2010 2011 2012 2013
Revenue (in billions) $16.39 $17.18 $18.39 $18.80 $19.28
Diluted EPS $2.89 $3.23 $3.65 $4.30 $4.17

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