Ross Stores' Growth Initiatives Show Potential - Analyst Blog

On Jun 25, 2014, we updated our research report on Ross Stores Inc. ROST which following its first-quarter fiscal 2014 results.

Ross Stores operates a chain of off-price retail apparel and home accessories stores, which target value conscious men and women, aged 25 to 54 in middle-to-upper middle income households. The company has a compelling business model as the competitive bargains it offers continue to make its stores attractive destinations for customers. 

Moreover, the off-price model offers strong value proposition and micro-merchandising that drive better product allocation and margins. We believe this will help sustain the company's top- and bottom-line growth trends.

Furthermore, the company's ongoing merchandise improvement and inventory management initiatives bode well for future growth. Its focus on store expansion, along with consistent share buybacks and attractive dividend payouts also highlight its financial strength.

The company remains focused on cutting down inventories at stores to the optimum level, while making available the right assortments at the right store at the right time. Lower inventory should help support Ross Store's strong merchandise margins and ability to continue capitalizing on in-season inventory buying opportunities in the marketplace to ensure a current assortment and better brand content.

The company's expansion plan indicates that there is still immense store growth potential for the company over the next few years. The company targets to grow its store base to 2,500 over the longer term, comprising 2,000 Ross Dress For Less and 500 dd's DISCOUNTS stores. This is way ahead of the company's current store count of 1,172 Ross and 137 dd's DISCOUNTS stores. Moreover, the company is underpenetrated in the 33 states it serves and has the possibility to substantially grow its base in these markets.

Now coming to the first-quarter results, the company's top and bottom line results fell short of expectations while it improved year over year. Moreover, the company provided a cautious outlook for the upcoming quarter as well as for fiscal 2014 due to an uncertain economic environment and a distressed retail market, along with its strong multi-year top and bottom line comparisons. Thus, we remain apprehensive about the company's near-term performance.

Moreover, this Zacks Rank #3 (Hold) company mainly caters to moderate or low-end consumers, who are more sensitive to economic factors and are already affected by record high energy prices. Thus, a hike in energy prices and a downturn in employment levels could affect the company's performance.

Key Picks from the Sector

A better-ranked stock among discount retailers is Burlington Stores Inc. BURL, which has a Zacks Rank #2 (Buy). Others retailers performing well in the retail sector include Citi Trends Inc. CTRN and Christopher & Banks Corp. CBK, both of which sport a Zacks Rank #1 (Strong Buy).