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Ross Stores (NASDAQ:ROST): A Discount Retail Giant Delivering Exceptional Value
Published on September 24, 2024 | Ticker: ROST

Ross Stores, Inc. is a leading off-price retailer of apparel and home fashions in the United States. The company operates two brands - Ross Dress for Less and dd's DISCOUNTS - that offer customers a wide selection of first-quality, in-season, name brand and designer merchandise at savings of 20% to 60% off department and specialty store regular prices.

Business Overview

Ross Stores has a long and successful history, having been founded in 1982 and growing to operate 1,775 Ross Dress for Less and 352 dd's DISCOUNTS stores across 43 states, the District of Columbia, and Guam as of May 4, 2024. The company's off-price business model allows it to offer customers exceptional value by purchasing merchandise opportunistically from manufacturers, brand name retailers, and other sources. This enables Ross Stores to provide a constantly changing assortment of branded products at prices well below traditional retail.

The Ross Dress for Less banner targets middle-income households, offering a broad selection of apparel, accessories, footwear, and home goods. In contrast, the dd's DISCOUNTS banner caters to lower-income consumers, providing a more moderately-priced assortment of similar merchandise categories. Both concepts have demonstrated the ability to thrive in various economic environments by offering customers the brands they desire at prices they can afford.

Financials

In fiscal 2023, which was a 53-week year, Ross Stores generated annual revenue of $20.38 billion and net income of $1.87 billion. The company's operating cash flow for the year was $2.51 billion, while free cash flow reached $1.75 billion. These strong financial results underscore Ross Stores' ability to execute its off-price model effectively and deliver value to both customers and shareholders.

For the first quarter of fiscal 2024, the company reported revenue of $4.86 billion, up 8.1% from the prior-year period. Net income for the quarter was $488 million, a 31.5% increase compared to the first quarter of fiscal 2023. Ross Stores' operating cash flow for the first quarter of fiscal 2024 was $369 million, while free cash flow reached $232 million.

Quarterly Performance and Outlook

In the first quarter of fiscal 2024, Ross Stores' comparable store sales increased 3%, driven by higher customer traffic. The company's earnings per share for the quarter was $1.46, exceeding the prior-year period's $1.09 per share. This strong performance was primarily due to lower distribution, incentive, and freight costs, which offset a decline in merchandise margins as the company continued to offer more sharply priced branded merchandise.

For the second quarter of fiscal 2024, Ross Stores expects comparable store sales to increase 2% to 3%, with earnings per share projected to be between $1.43 and $1.49. The company's full-year fiscal 2024 guidance calls for comparable store sales growth of 2% to 3% and earnings per share in the range of $5.79 to $5.98.

Geographical and Merchandise Performance

During the first quarter of fiscal 2024, Ross Stores' strongest performing regions were California and the Pacific Northwest, which benefited from easier comparisons due to poor weather in the prior-year period. Texas also outperformed the company average, while Florida was slightly below the chain's performance.

In terms of merchandise categories, accessories and children's were the best-performing areas in the first quarter. The company's home accents and bed and bath categories, as well as the ladies and men's apparel segments, also contributed to the overall sales growth.

The dd's DISCOUNTS banner outperformed the Ross Dress for Less concept in the first quarter, as shoppers responded favorably to the improved value offerings at dd's. Management noted that they are in the early stages of making merchandise adjustments to better address the needs of dd's customers, and they remain encouraged by the initial customer response.

Liquidity

As of May 4, 2024, Ross Stores had $4.65 billion in cash and cash equivalents, reflecting the company's strong liquidity position. The company's current ratio stood at 1.54, indicating a healthy ability to meet short-term obligations. Ross Stores' debt-to-equity ratio was 0.63, suggesting a conservative capital structure.

During the first quarter of fiscal 2024, the company repurchased 1.9 million shares of common stock for $262 million under its new $2.1 billion two-year share repurchase program. Ross Stores also paid $123 million in dividends to shareholders during the quarter.

Risks and Challenges

While Ross Stores has demonstrated resilience in various economic environments, the company faces several risks and challenges that investors should consider. These include:

1. Macroeconomic and geopolitical uncertainties: Prolonged inflation, high interest rates, and ongoing global conflicts could continue to pressure the purchasing power of the company's low-to-moderate income customer base.

2. Competitive landscape: Ross Stores operates in a highly competitive off-price retail industry, where it must continuously adapt its merchandise assortment and pricing to maintain its value proposition.

3. Supply chain disruptions: Potential supply chain challenges, such as shipping delays and higher freight costs, could impact the company's ability to deliver the right products at the right time.

4. Regulatory and legal risks: Changes in federal or state tax policies, as well as potential legal and regulatory proceedings, could adversely affect Ross Stores' financial performance.

Despite these risks, Ross Stores' proven business model, focus on delivering exceptional value, and strong financial position position the company well to navigate the current environment and continue its growth trajectory.

Conclusion

Ross Stores has established itself as a leading off-price retailer, offering customers a constantly changing assortment of branded merchandise at significant discounts. The company's strong first-quarter results, with an 8.1% increase in revenue and a 31.5% jump in net income, demonstrate its ability to execute its strategy effectively.

Looking ahead, Ross Stores' focus on providing sharply priced branded products, coupled with its ongoing store expansion plans, position the company to continue gaining market share and delivering value to its customers and shareholders. With a solid financial foundation, the company is well-equipped to navigate the current macroeconomic challenges and capitalize on the growing demand for off-price retail offerings.

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