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ROSS STORES FINDS NEW HOME IN FORMER ALBERTSONS UNITS

By Maura K. Ammenheuser

Luxury retail might attract the buzz, but there’s plenty of growth going on where the other half shops, as Ross Stores can attest. The chain buys brand-name goods at closeout prices and resells them at its Ross Dress for Less stores for what it trumpets as 20 to 60 percent off department and specialty store prices. Its DD’s Discount chain offers goods at 20 percent to 70 percent off department and discount stores’ regular prices.

Besides men’s, women’s and children’s clothing, the company sells accessories, shoes and home items. Ross Stores operates 772 Ross Dress for Less shops in 27 states and Guam, and 26 DD’s Discount units in California as of late October. Pleasanton, Calif.-based Ross posted sales of $4.9 billion in fiscal 2005 (ended Jan. 28, 2006) and net earnings of $199.6 million. Comparable-store sales were up 6 percent year on year. “Ross is a huge success story,” said Howard Davidowitz, chairman of New York City-based retail consulting firm Davidowitz & Associates.

Ross Stores CEO Michael Balmuth credits the results to improved operating margins and strong third-quarter sales in Texas and the Southwest. Home decor and shoes were the best-performing categories, he says.

For the first three quarters of fiscal 2006, the company reported sales of $3.9 billion, while comps rose 5 percent year on year. In October Ross seized a big opportunity. The company announced the acquisition of 46 Albertsons supermarket sites for an undisclosed price in Arizona, California, Colorado, Florida, Oklahoma and Texas. Ross executives have not identified specific locations or how many of these sites will become Dress for Less versus DD’s stores. Balmuth says the company will release details in February, at the end of its fiscal 2006 year. Ross will spend $1.5 million to $2 million per site to convert the stores.

Stacia Levenfeld, a spokeswoman for Albertsons, said in mid-November that some of those supermarkets were closed and others were struggling. Ross executives had said they expected to take possession of the first of the units that month and then convert and reopen some as early as March.

The Albertsons sites will contribute to an approximately 12 percent increase in the number of stores the company operates by the end of fiscal 2008. Almost all of those will be in the company’s core Sun Belt states, Balmuth said in a news release.

Some retail experts called the Albertsons acquisition brilliant. The supermarkets sit in venues Ross favors: suburban open-air community centers. “The availability of quality retail locations is generally limited in these more established areas,” a company press release said. The sites are in markets where Ross already operates.

“Good retail real estate in California is like gold — it’s too hard to come by,” said George Whalin, president and CEO of Retail Management Consultants, in San Marcos, Calif. The deal is a good thing for Ross, he says.

“It’s a great move for them to be able to open a critical mass of stores quickly,” said Jeff Green, president of Jeff Green Partners, a retail real estate consulting firm in Mill Valley, Calif. These sites offer huge convenience because they are closer to people’s homes than either Ross’ rivals or the older Ross stores are, Green said.

Sources describe the strategy as novel. They say they were unaware of clothing discounters’ pursuit of such real estate, especially on this scale of nearly 50 stores, though Whalin says Ross has bought supermarket buildings in the past, a few at a time. “It’s a different site-location strategy, but it’s the only way big-box operators can get a leg up: becoming more convenient,” Green said. Neither Katie Loughnot, Ross Stores’ vice president of investor relations, nor Albertsons’ Levenfeld would reveal any landlords affected by the deal.

Landlords are likely to be happy to find uses for empty or underperforming supermarkets, though for some the experience could be bittersweet. “Obviously, when you lose a grocery store anchor you lose a lot of traffic,” Whalin said. Lack of a supermarket probably violates leases with at least some of the other tenants. But landlords with good locations and yet saddled with underperforming supermarkets are likely to view the Ross deal as a blessing, Green says. Ross executives are probably trying to decide which stores should become Ross units and which should go DD’s Discount, he says.

Ross launched DD’s Discount about two years ago. Loughnot describes its offerings as similar to those of a JCPenney versus those of a Federated store. DD’s accounts for just 3.5 percent of the company’s total units, and many industry experts are unfamiliar with the chain. Even so, Davidowitz is upbeat about the division. “I think it has real potential,” he said. DD’s offers sharper fashion sense than the typical off-price shop, he says. “DD’s is like nothing else,” he said. The chain is perfect for “very low-end centers,” he says, while middle markets are right for Ross.

Closeout merchants do not get the attention that such blockbuster successes as Neiman Marcus, Nordstrom or Target do. But plenty of off-price chains manage to do solid business catering to frugal fashionistas. Everyone cites T.J. Maxx and Marshalls as Ross Stores’ peers, though there are many smaller closeout operators too, such as Stein Mart. TJX Cos., which operates 2,300 stores under eight banners in the U.S., Canada and Europe, owns T.J. Maxx and Marshalls; the company posted $16 billion in revenue in 2005. TJX year-on-year net sales rose 11 percent to $4.5 billion for the first three quarters of 2006, while comps climbed 6 percent.

Because Ross has far fewer stores than TJX Cos., Green says, it has more room to grow. Opening more stores is not likely to swamp Ross if it is careful where it places Ross units versus DD’s stores, he says.

The May-Federated merger was a boon for Ross, Davidowitz says, because as the chains consolidated and closed stores, many merchandise orders were canceled, and vendors ended up with surplus goods. “That’s what Ross loves,” he said.

Patricia Pao, founder of Pao Principle, a New York City-based market consulting firm, predicts that this is the start of Ross Stores’ evolution. Ross, she says, will emulate Kohl’s, which began as an off-price business and then evolved into a middle-market purveyor of private-label goods. Ross may be preparing to shift into private-label and fashion-forward merchandise, Pao says, including the signing of exclusive designers.

Loughnot, though, denies such a strategy, insisting that Ross will continue as an off-price chain. But competition for inventory and the need for organic growth could eventually force Ross and other off-price merchants to morph into middle-market family department stores, in the manner of Target or Kohl’s, says Whalin. A lot of Ross’ growth has come from new stores, he points out, and though comp sales are strong now, they were flat during 2003 and 2004. At some point, revenue increases are going to have to come from a strong business model, he says. “They’ve got to find new ways to grow.”