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Sunil Rajak
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Sunil Rajak is an analyst for Gridstone Research (http://www.gridstoneresearch.com/).
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  • ROST is Operationally Better Placed than its Peers to Deliver

    [Arun Nair has also contributed to this article]

    Based on our analysis below we find that ROST even in the current environment has been able to maintain a strong cash flow position and capital structure on the back of its above-average operational performance. And based on the latest two monthly sales data we expect ROST to post a healthy sales growth and operational performance along with maintained cash flow position for QE Apr-09.
     
    Consistent above-average sales growth: Comparing the monthly sales performance of Ross Stores, Inc. (NASDAQ:ROST) with respect to its peers we find that ROST is charting a stable above-average growth in the apparel and clothing retail industry. The average y-o-y monthly sales growth and average y-o-y monthly comparable store sales growth of 9% and 3% respectively are above the peers’ average. Also stability of its sales growth is better when compared to its peers. The standard deviation of y-o-y sales growth and y-o-y comparable store sales growth for ROST stands at 4% and 3% respectively which is lesser than its peers. (Click here to see details)
     
    New stores contributing to growth: The annual sales per store have increased from $6,533 in FYE Jan-05 to $6,785 in FYE Jan-09. The annual sales per average selling square footage have remained flat from $297 in FYE Jan-05 to $298 in FYE Jan-09. The number of stores has increased from 649 in FYE Jan-05 to 956 in FYE Jan-09. The average y-o-y non-comparable store sales growth of 7% shows that even the new stores are performing well and contributing towards revenue growth.
     
    Exhibit No 1: Store level performance of ROST from FYE Jan-03 to FYE Jan-09

     
     Unit
    FYE Jan-03
    FYE Jan-04
    FYE Jan-05
    FYE Jan-06
    FYE Jan-07
    FYE Jan-08
    FYE Jan-09
    Sales revenue, net
    $M
    3,531
    3,920
    4,240
    4,944
    5,570
    5,975
    6,486
    y/y growth
     
     
    11%
    8%
    17%
    13%
    7%
    9%
    Selling square footage
    K
    11,843
    13,321
    15,253
    17,319
    18,642
    21,100
    22,500
    y/y growth
     
     
    12%
    15%
    14%
    8%
    13%
    7%
    Sales per average selling square foot
    $
    316
    312
    297
    304
    305
    301
    298
    y/y growth
     
     
    -1%
    -5%
    2%
    0%
    -1%
    -1%
    Sales per store
    $
    6,965
    6,902
    6,533
    6,736
    6,989
    6,714
    6,785
    y/y growth
     
     
    -1%
    -5%
    3%
    4%
    -4%
    1%
    Number of stores-Total
    #
    507
    568
    649
    734
    797
    890
    956
    y/y growth
     
     
    12%
    14%
    13%
    9%
    12%
    7%

     
    Better inventory management contributing to shorter cash conversion cycle: In spite of the consistent store growth and sales growth, ROST has been able to maintain its low level inventory which is evident from the inventory per store which has declined from $1,315 in FYE Jan-05 to $922 in FYE Jan-09. The inventory per selling square footage has declined from $55,931 in FYE Jan-05 to $39,158 in FYE Jan-09. The days inventory outstanding has also declined from 95 days in FYE Jan-05 to 65 days in FYE Jan-09 which indicates better inventory management even during depressed economic environment.  This has resulted in a shorter cash conversion cycle of 28 days in FYE Jan-09 from 47 days in FYE Jan-05.
     
    Exhibit No 2: Inventory level performance of ROST from FYE Jan-03 to FYE Jan-09

     
     Unit
    FYE Jan-03
    FYE Jan-04
    FYE Jan-05
    FYE Jan-06
    FYE Jan-07
    FYE Jan-08
    FYE Jan-09
    Inventories, net
    $M
    717
    841
    853
    938
    1052
    1025
    881
    y/y growth
     
     
    17%
    1%
    10%
    12%
    -3%
    -14%
    Inventories per store
    $
    1,413
    1,481
    1,315
    1,278
    1,320
    1,152
    922
    y/y growth
     
     
    5%
    -11%
    -3%
    3%
    -13%
    -20%
    Inventory per selling square foot
    $
    60,501
    63,170
    55,931
    54,165
    56,417
    48,592
    39,158
    y/y growth
     
     
    4%
    -11%
    -3%
    4%
    -14%
    -19%
    Days inventory outstanding
    Days
    99
    105
    95
    89
    89
    81
    65
    Cash conversion cycle
    Days
    46
    52
    47
    46
    32
    33
    28

     
    Better operational efficiency: ROST enjoys a lower debt level of ~ $150 million which is around 6% of its total assets. The cash balance for ROST has increased from $115 million in FYE Jan-05 to $321 million in FYE Jan-09. The net cash from operating activities have also increased from $298 million in FYE Jan-05 to $583 million in FYE Jan-09. The lower debt level has helped ROST in reducing its borrowing cost which enables it to operate in an efficient manner.
     
    Exhibit No 3: Operational level performance of ROST from FYE Jan-03 to FYE Jan-09

     
     Unit
    FYE Jan-03
    FYE Jan-04
    FYE Jan-05
    FYE Jan-06
    FYE Jan-07
    FYE Jan-08
    FYE Jan-09
    Long-term debt
    $M
    25
    50
    50
    0
    150
    150
    150
    Net cash flows provided by/(used in) operating activities
    $M
    355
    321
    298
    375
    507
    354
    583
    Total assets
    $M
    1,378
    1,691
    1,741
    1,939
    2,359
    2,371
    2,356
    Cash and equivalents
    $M
    151
    202
    115
    192
    367
    258
    321

     
    Consistent growth in dividend payment: ROST under the current scenario has been able to pay handsome dividends to its shareholders in comparison to its peers. The dividend declared per share has increased from $0.22 in FYE Jan-06 to $0.40 in FYE Jan-09.
     
    Exhibit No 4: Dividend declaration of ROST & its peers from FYE Jan-03 to FYE Jan-09

     
     Cash dividends
    declared per share
    Unit
    FYE Jan-03
    FYE Jan-04
    FYE Jan-05
    FYE Jan-06
    FYE Jan-07
    FYE Jan-08
    FYE Jan-09
    ROST
    $
     
     
     
    0.22
    0.26
    0.32
    0.40
    ANF
    $
    0.00
    0.00
    0.50
    0.60
    0.70
    0.70
     
    CLE
    $
     
     
     
    0.40
    0.40
     
     
    GPS
    $
     
     
     
    0.18
    0.32
    0.32
    0.34
    M
    $
     
     
     
    0.39
    0.51
    0.52
     
    MW
    $
     
     
     
    0.05
    0.20
    0.23
    0.28
    SKS
    $
     
     
     
    0.00
    8.00
     
     
    TJX
    $
    0.12
    0.14
    0.18
    0.24
    0.28
    0.36
    0.44
    TLB
    $
     
     
     
    0.47
    0.51
    0.52
    0.52

     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
    Price to free cash flow: The Price to Free cash flow ratio which stands at 10.59 shows that ROST has been among the undervalued firms when compared to its peers. A look into the stock price shows that the price has not been affected much. In fact in the recent times the stock price has been on the higher side which shows that ROST hasn’t been affected much by the recent financial turmoil.
     
    Exhibit No 5: Price to free cash flow ratio of ROST & its peers from FYE Jan-03 to FYE Jan-09

     Price to
    Free cash flow
    Unit
    FYE Jan-03
    FYE Jan-04
    FYE Jan-05
    FYE Jan-06
    FYE Jan-07
    FYE
    Jan-08
    FYE Jan-09
    ROST
    Ratio
    12.65
    21.87
    25.42
    20.63
    9.60
    33.43
    10.59
    AEO
    Ratio
    30.67
    11.05
    13.62
    10.74
    13.48
    23.43
    16.85
    JWN
    Ratio
    -
    -
    42.86
    27.77
    27.93
    5.07
    8.54
    ANF
    Ratio
    13.65
    13.85
    19.48
    29.35
    39.19
    16.75
    -
    GPS
    Ratio
    5.70
    13.46
    64.05
    16.30
    22.76
    13.93
    11.50
    JCP
    Ratio
    -
    -
    -
    20.37
    -
    -
    -
    M
    Ratio
    -
    -
    -
    N/M
    6.82
    4.51
    3.75
    MW
    Ratio
    11.64
    9.00
    55.18
    11.50
    N/M
    128.45
    64.11
    SKS
    Ratio
    11.91
    11.38
    5.50
    N/M
    N/M
    N/M
    N/M
    SSI
    Ratio
    -
    N/M
    9.91
    36.80
    N/M
    6.36
    N/M
    TJX
    Ratio
    19.14
    40.58
    19.09
    15.38
    16.12
    16.56
    14.29
    TLB
    Ratio
    -
    14.97
    23.79
    10.62
    N/M
    33.94
    2.58
    LTD
    Ratio
    -
    -
    -
    -
    -
    3.76
    -

    Maintaining its operational strength will be key to its continued better performance.

    Apr 15 9:27 AM | Link | Comment!
  • CSX Improves its Operational Performance in Tough Time

    CSX 1QFY09 quarterly performance better than expected

    [Ms. Swarnali Datta has also contributed to this article]

    CSX experienced a 17% y/y decline in revenue mainly due to a 17% decline in volumes and with flat overall revenue per unit, which has maintained at year-ago levels in most of sub-segments while impoved in few. The below exhibit shows CSX's pricng resilience. 

    Exhibit #1:  Pricing power: Barring sub-segments Forest Products, Metals & segment Intermodal , CSX has been able to  maintain its year-ago pricing
    Pricing MetricsUnitQE Mar-08QE Jun-08QE Sep-08QE Dec-08QE Mar-09Y/y % Chng. FYE Dec-07FYE Dec-08Y/y % Chng.
    Revenue per unit$1,5801,6381,7101,6681,5840% 1,4091,64917%
     Rail$1,9562,0262,1352,1202,0193% 1,7332,05719%
        Merchandise$2,0652,1182,2312,2152,1373% 1,8452,15517%
            Chemicals$2,8062,9223,0733,0092,9335% 2,5152,94517%
            Emerging Markets$1,4001,4291,5271,5051,4735% 1,2321,46419%
            Forest Products$2,2072,2532,3902,3102,154-2% 2,0512,28511%
            Agricultural Products$2,1562,2782,4432,4862,2846% 1,9172,34022%
            Metals$2,1412,1882,3372,2632,021-6% 1,9772,22813%
            Phosphates and Fertilizers$1,4291,4071,3331,3031,4501% 1,1631,37318%
            Food and Consumer$2,4072,2802,3802,3542,4000% 2,0802,29110%
       Total Coal$1,6461,7271,8161,8031,7265% 1,3981,74825%
            Coal$1,6361,7271,8231,8061,7185% 1,4021,74825%
            Coke and Iron Ore$1,8261,7411,7141,7271,9386% 1,3191,75033%
        Automotive$2,1042,2282,4682,3952,1110% 1,9112,28620%
      Intermodal$685726750669614-10% 64270910%
        International$486523531493446-8% 46450910%
        Domestic$855903931779724-15% 8248695%
    Source: Data via Gridstone Research

    Volume decline has been across segments and worst hit ones are expectedly Automotive and Metal sub-segments. Even in revenue ton-miles, volume has dipped by 15% y/y with worst performance experienced in Automotive segment.

    Exhibit #2: Decline in volume across segments

    Volume MetricsUnitQE Mar-08QE Jun-08QE Sep-08QE Dec-08QE Mar-09Y/y % Chng. FYE Dec-07FYE Dec-08Y/y % Chng.
    VolumeK1,7171,7751,7321,6031,419-17% 7,1166,827-4%
       RailK1,2091,2451,2001,104979-19% 5,0054,758-5%
          MerchandiseK650676653557503-23% 2,7042,536-6%
             ChemicalsK129129124107105-19% 522488-7%
             Emerging MarketsK1151191129991-21% 491429-13%
             Forest ProductsK8783827165-25% 352316-10%
             Agricultural ProductsK1091081061091090% 4104325%
             MetalsK9296925748-48% 355337-5%
             Phosphates and FertilizersK9191876660-34% 362335-7%
             Food and ConsumerK2750504825-7% 212199-6%
          Total CoalK463477468471431-7% 1,8621,8791%
             CoalK440450440449415-6% 1,7711,7790%
             Coke and Iron OreK2327282216-30% 9110010%
       AutomotiveK9692797645-53% 439343-22%
       IntermodalK508530532499440-13% 2,1112,069-2%
          InternationalK253262258227186-26% 1,1321,000-12%
          DomesticK2552682742722540% 9791,0699%
                
    Revenue ton-milesB6264635853-15% 248246-1%
       MerchandiseB3435343028-18% 135132-2%
       CoalB2223232321-7% 86905%
       AutomotiveB22111-53% 86-22%
       IntermodalB55554-13% 2019-4%
    Source: Data via Gridstone Research

    Segmental Performance

    The Rail segment declined by 16% y/y which was led by a 20% decline from Rail – Merchandise segment, primarily led by 23% decline in volumes and a 2% decline in Rail–Coal segment, led by 7% decline in volumes offsetting a 5% increase in revenue per unit. Lower natural gas prices and lower industrial production suppressed demand in these sub-segments.

    The Automotive segment took a decline of 53% in revenues due to volume decline.

    The Intermodal segment experienced a decline of 22% y/y which was led by 13% decline in volumes, and a 10% decline in revenue per unit due to decreased fuel recovery.
     
      Exhibit # 3: Segment performance is worst for Automotive and Metals
    CSXUnitQE Mar-08QE Jun-08QE Sep-08QE Dec-08QE Mar-09Y/y % Chng. FYE Dec-07FYE Dec-08Y/y % Chng.
    Sales revenue, net$M2,7132,9072,9612,6742,247-17% 10,03011,25512%
      Rail$M2,3652,5222,5622,3401,977-16% 8,6749,78913%
        Merchandise$M1,3421,4321,4571,2341,075-20% 4,9905,46510%
          Chemicals$M362377381322308-15% 1,3131,4379%
          Emerging Markets$M161170171149134-17% 6056284%
          Forest Products$M192187196164140-27% 7227220%
          Agricultural Products$M2352462592712496% 7861,01129%
          Metals$M19721021512997-51% 7027517%
          Phosphates and Fertilizers$M1301281168687-33% 4214609%
          Food and Consumer$M6511411911360-8% 4414563%
      Total Coal$M762824850849744-2% 2,6033,28526%
        Coal$M720777802811713-1% 2,4833,11025%
         Coke and Iron Ore$M4247483831-26% 12017546%
      Automotive$M20220519518295-53% 839784-7%
      Rail-Other$M59616075637% 2422555%
      Intermodal$M348385399334270-22% 1,3561,4668%
        International$M12313713711283-33% 525509-3%
        Domestic$M218242255212184-16% 80792915%
        Other$M767103-57% 242817%
    Source: Data via Gridstone Research 

    Operating income performance was in line with topline decline of  17% y/y. Steep decline of 57% in Fuel Expenses helped in restricting total operating expense to $2,247 million. Further, as a result of several productivity initiatives undertaken by the company an operating ratio of 76.8% vis-a-vis 76.9% in the prior year. Such improvements are seen in on-time train origination and destination arrival, which currently stood at 83% and 79% respectively, as compared to year-ago levels of 79% and 69% y/y.

    Exhibit #4: Rationalizing its capacity when it's needed -- CSX has reduced no. of freight cars as freight  volume has shrunk.

    Capacity MetricsUnitQE Mar-08QE Jun-08QE Sep-08QE Dec-08QE Mar-09Y/y % Chng. FYE Dec-07FYE Dec-08Y/y % Chng.
    No. of Employees#33,81034,28634,80734,36331,787-6% 35,06434,363-2%
    No. of Locomotives#4,0494,0984,1334,1434,1292% 4,0074,1433%
    No. of Freight cars#93,35192,08391,83391,35090,027-4% 94,36491,350-3%
    Route miles#21,22521,22421,20321,20421,1780% 21,16621,2050%
    Average daily fleet of cars-on-line#221,193224,460226,425222,195218,863-1% 221,943223,5741%
    Source: Data via Gridstone Research

    Exhibit#5:  Improved operational efficiency across various operational parameters

    Operational efficiencyUnitQE Mar-08QE Jun-08QE Sep-08QE Dec-08QE Mar-09Y/y % Chng. FYE Dec-07FYE Dec-08Y/y % Chng.
    Average velocity, all trainsMiles20.820.020.121.221.64% 2120.5-1%
    On-time originations%79.0%75.2%77.0%85.0%83.0%5% 179.0%0%
    On-time arrivals%69.0%65.2%67.0%77.0%79.0%14% 170.0%0%
    Dwell (hours)hrs22.723.324.123.224.16% 2323.30%
    FRA personal injuries
    frequency index
    Ratio1.101.251.121.071.3018% 11.14-8%
    FRA train accident rateRatio2.922.362.752.393.085% 32.68-11%
                
    Operating ratio%76.9%75.3%75.2%74.1%   175.4%-3%
    Operating ratio-Rail%76.1%74.6%75.2%72.8%74.8%-2% 174.7%-3%
    Operating ratio-Intermodal%82.5%80.3%75.7%83.2%91.1%10% 180.2%-1%
    Source: Data via Gridstone Research

    A 40% decline income tax expense helped in restricting net income decline to 30% despite 18% y/y increase in interest expense due to increased long-term portion of debt ($483 M y/y).

    Exhibit #6: Operational strength and pricing power helped CSX achieve better-than-expected performance

    CSXUnitQE Mar-08QE Jun-08QE Sep-08QE Dec-08QE Mar-09Y/y % Chng. FYE Dec-07FYE Dec-08Y/y % Chng.
    Sales revenue, net$M2,7132,9072,9612,6742,247-17% 10,03011,25512%
    Total operating expenses$M2,0872,1902,2281,9821,725-17% 7,7708,4879%
       Labor and fringe expenses$M745733754723662-11% 2,9862,955-1%
       Materials, supplies and other expenses$M507513568547477-6% 1,9252,13311%
       Fuel expenses$M441537508331191-57% 1,3121,81738%
       Depreciation expense$M2222272272282241% 8839042%
       Equipment and other rents expense$M111112106961132% 451425-6%
       Inland transportation expense$M6368655758-8% 2402535%
       Gain on insurance recoveries$M-2  0 -100% -270-100%
    Operating income/(loss)$M626717733692522-17% 2,2602,76822%
                
    Other income / (expense), net$M5568-172-9-116% 89-103-216%
    Interest expense$M11913313113614118% 41751924%
    Profit before tax$M562590610384372-34% 1,9322,14611%
    Provision/(benefit) for income taxes$M211205228137126-40% 70678111%
    Net income/(loss)$M351385382247246-30% 1,3361,3652%
    EPS-Basic$0.870.950.950.64 -100% 3.113.4110%
    EPS-Diluted$0.850.930.940.630.62-27% 2.993.3412%
    Weighted average shares outstanding-BasicM404406402390394-3% 430401-7%
    Source: Data via Gridstone Research

    Better operating performance help CSX maintain its pricing power. This augurs well for the company and stock.

    Tags: CSX, Railroad
    Apr 15 8:25 AM | Link | Comment!
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