By Neil Saunders
Ross Stores delivered a good set of numbers, especially on the top line, where Ross lapped tough prior-year comparatives. The bottom line also advanced, although most of this was due to a much lower tax provision than last year. Growth in earnings before taxes was solid, but higher freight costs dragged down margins, which limited profit gains.
The opening of 93 stores over the past 12 months has helped boost revenues. However, without bolder moves and an enhancement of the offer, Ross will, at best, remain a steady state retailer.
The sales gains at Ross are due to two main factors.
First, the opening of 93 stores over the past 12 months has helped boost revenues. This enlargement of the fleet continues the expansion program that has been ongoing for some time. Ross’ recent increase in its store growth targets to 3,000 outlets across the U.S. ensures that overall growth will be supported for some time to come.
The second factor is the improvement in the fortunes of Ross shoppers. Our data shows that the consumer segments that shop at Ross have seen reasonable gains in disposable income over the past year. Confidence among the group has also risen, which means they are now both abler and more willing to spend money, especially on treats for themselves.
One interesting dynamic is that while some of that money has gone to Ross, core consumers have also started to spend a bit more elsewhere as their incomes have risen. So, Ross has not captured the full value of the improvement in its customers’ fortunes. This stands in marked contrast to TJX, which has captured the lion’s share of increased spending as incomes have risen.
This difference reflects the relative strength of the propositions. TJX has a strong assortment with a vast amount of choice spanning numerous categories, including homewares. In contrast, Ross has a reasonable assortment with a more limited selection of brands. It is also relatively underdeveloped in categories like home, so has not been able to capitalize on the growth from these segments. While Ross is operationally sound, it lacks the hunger and dynamism of TJX, and this is reflected on the shop floor.
A lack of bold thinking has not harmed Ross to date, but the lack of it will start to show up as Ross moves into the next few quarters. The company is coming up against tough prior-year comparatives, especially in Q4. With little to power growth other than new store openings, sales performance could soften.
A softer outcome on the top line would coincide with bottom-line pressures. These are mostly coming from higher wages and more expensive freight costs. Ideally, Ross needs to offset these dynamics with higher sales numbers and better store productivity; however, we are not optimistic that these things will materialize.
The good news is that if the economy and consumer sentiment soften, this will be less detrimental to Ross than it would be to other retailers. Ross still has a strong value proposition, and this will hold it in good stead over the next few years. However, without bolder moves and an enhancement of the offer, Ross will, at best, remain a steady state retailer.
Neil Saunders is managing director of research firm GlobalData Retail.