By Håkon Helgesen
Today’s numbers from Ross provide another sign that the apparel market as a whole struggled during the first quarter. While Ross’ numbers were far from terrible, there has been a distinct slowdown in growth from a company that, like TJX, has a long-standing record of reporting stellar numbers.
The total sales uplift of 7% is respectable enough and has been helped along by the 88 new stores opened over the past 12 months. However, the 3% comparable uplift is uncharacteristically slim, particularly since it comes off the back of a moderate prior year comparative.
Ross will continue to open stores, adding about 80 to 90 each year across both the Ross and dd’s banners. Physical shops … remain a vital route to growth for off-price players. Arguably, new stores will become even more important for driving the business if comparable sales growth continues to moderate.
As with TJX, our data show that Ross suffered from more customer sharing during the first quarter as excessive discounting in the market persuaded some shoppers to spend more elsewhere. Fortunately, there was little erosion in customer numbers which suggests that Ross has not fallen out of favor with consumers – it just has to work a bit harder in getting the shoppers it does have to spend more.
Against this challenging backdrop, Ross’ tendency to err on the side of caution when issuing future forecasts has paid dividends. The low-ball sales estimate it released at the end of last quarter has been comfortably beaten.
While sales growth is lower, Ross has engineered a much better outcome on the bottom line where net earnings rose by 10.4%. Most of this is down to an increase in operating margin, which at 15.2% exceeded forecasts. A reduction in interest expense also helped the profit figure. In our view, we expect the healthy profit gains to continue across the rest of this year.
Looking ahead, Ross will continue to open stores — adding about 80/90 each year across both the Ross and dd’s banners. Although there is some background noise in the industry which talks down the importance of physical shops, we believe that these remain a vital route to growth for off-price players, and see no reason why Ross should slow the pace of development.
Arguably new stores will become even more important for driving the business if comparable sales growth continues to moderate. Ross has forecast just this, penciling in a 1-2% same-store uplift for the next quarter. Given Ross’ record of under-forecasting, this could well be a conservative judgment, but it does underline the fact the business sees current pressures continuing for some time.
Over the medium term, we are more optimistic about Ross’ comparable sales. We think that improvements to the range — especially in womenswear — along with opportunities in underweight categories like homewares will provide some buoyancy. That said, Ross will nonetheless need to work much harder to make headway in the year ahead.
Håkon Helgesen is an analyst at GlobalData Retail.