Ross Stores, Inc. (NASDAQ:ROST), an apparel and home fashion retailer that specializes in selling off-season brand names at steep discounts, has been one of the strongest growth stocks over the past decade, rising 550% since 2003. However, the stock stumbled recently, after the Pleasanton, Calif.-based company posted negative February same-store sales growth that missed already downbeat analyst projections. This rare miss shook up investors who had grown accustomed to its relative strength in strained economic times. Are Ross’ best days behind it, as the country comes to terms with a potentially crippling payroll tax hike, or are bearish concerns overblown?
To better understand Ross’ growth prospects, we must first understand the bigger picture. In the United States, the biggest macro factor causing concern among apparel retailers is the much maligned payroll tax hike.
In 2013, an average American worker who earns $50,000 a year will pay roughly $1,000 more in taxes, as a result of the Social Security payroll tax rising two percentage points. Research from the nonpartisan Tax Policy Center indicates that workers earning $30,000 to $200,000 annually will face far higher reductions to their income that higher paid ones.
Lower disposable income does not paint a pleasant picture for retail stocks in 2013. Many investors’ initial response was to invest in discount retailers, such as Ross, The TJX Companies, Inc. (NYSE:TJX), Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT), since these seemed the most likely to profit as people started to curb their spending habits.
Although that investment thesis is solid in theory, Wal-Mart’s disappointing fourth quarter earnings showed that not even the cheapest retailers were immune from the payroll tax hike.
Wider rather than deeper
So where does that leave Ross? Can it succeed where even mighty Wal-Mart Stores, Inc. (NYSE:WMT) failed?
Ross Stores, Inc. (NASDAQ:ROST) is an off-price retailer that sells overstock brand names at discount prices. It operates more than 1,200 stores across the United States, making it the third largest off-price retailer in the country after T.J. Maxx and Marshalls - which are both owned by The TJX Companies.
Ross’ business model is slightly different from T.J. Maxx, as it purchases a large amount of "packaway" inventory at a discount at the end of the season. This inventory is often stored for several quarters prior to selling, as opposed to constant purchases throughout the year. This strategy helps the company maintain its pricing and inventory better, and offers stronger control over its full-year outlook.
Ross also focuses on offering a broad variety of branded overstock, without concentrating on a particular group of products. Therefore, despite offering branded products that may not be the newest on the market, its wide variety of products constantly feels fresh to regular shoppers - a tactic the company calls “wider rather than deeper”.
Ross’ larger competitors, such as Target, H&M, Kohl's Corporation (NYSE:KSS) and Burlington Coat Factory either offer a more limited selection of brands, or their products are higher priced.
Ross also has some ambitious growth plans. The company intends to more than double its stores by the end of the decade, with a target of 2,500 stores - to catch up with TJX, which operates 2,900 stores.
Optimism, skepticism, pessimism
Thanks to these positive micro catalysts, shares of Ross were up roughly 8% over the past twelve months, and 67% over the past two years. However, a nasty plunge on March 7 erased most of the year’s gains after a lackluster February sales report cast serious doubts on the company’s growth potential in 2013.
This simple chart illustrates the downward trend in Ross’ same-store sales.
|Month||Same-Store Sales Growth|
Source: Ross Stores Sales Releases
Analysts surveyed by Thomson Reuters were expecting a modest 1.1% increase for February. What’s more, February is traditionally a strong month for Ross, which posted 9% same-store sales growth a year earlier.
While those numbers look to get progressively worse as the year progresses, Ross CEO Michael Balmuth stated, “We believe the slight decline in February same store sales was mainly due to the delay in income tax refunds.”
Looking forward, Balmuth offered these same-store sales figures for March and April.
|Same-Store Sales Forecast||Prior Year Growth|
|March 2013||-1% to -2%||+10%|
|April 2013||+5% to +6%||+7%|
Source: Ross Stores Sales Release
Balmuth believes sales will pick up around Easter, which falls on March 31 this year. However, its March numbers are too bleak to ignore - especially compared to the prior year’s 10% growth - which makes me wonder if Ross can truly hit those sales targets for April.