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ROST is Operationally Better Placed than its Peers to Deliver

|Includes: AEO, ANF, GPS, JCP, JWN, LB, M, Ross Stores, Inc. (ROST), SKS, SSI, TJX, TLB, TLRD

[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.