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Ross Stores' focus: a winning strategy

Isadore Barmash

Isadore Barmash, who formerly covered retailing for The New York Times, is a writer and lecturer based in New York.

Ross Stores Inc. might not be as well-known as its two larger competitors -- T.J. Maxx and Marshalls -- but it has the distinction of being the retail industry's best profit and same-store sales performer.

But what this $14 billion, off-price chain lacks in fame it makes up in focus. While T.J. Maxx and Marshalls operate nationwide, Ross is present in only 17 states, with many of its 326 stores in California. And while it might have tried different strategies, Ross has always cashed in by returning to its roots as a genuine brand-name, off-price retailer.

With discount and off-price stores now outselling department and specialty stores, the Palo Alto, Calif.-based Ross is also noteworthy for some very productive strategies it has followed since 1990. These include:

* Doubling the size of the New York merchandising staff, and hiring more experienced buyers who have increased the vendor roster and the value of the off-price offerings.

* Beefing up soft-lines assortments and diversifying into home goods, particularly in decorative accessories, bed and bath goods. The categories accounted for an estimated 12% of total sales in1997. The canny move allowed Ross to compete more directly with department stores and sheltered the company from the vagaries of the apparel market.

* A "pack-away" buying policy of snapping up opportunistic, end-of-season goods bought at the sharpest discounts. These items are now said to amount to at least 35% of total inventory. Ross can thus pick up closeouts from the top fashion and apparel houses and deploy them in periods of highest demand.

* A conservative stance on expansion, inventory and expense control.

This has helped boost Ross' operating margin to 8% of sales, the best in the off-price business. A healthy balance sheet and lack of long-term debt have prompted forecasts of 10% annual sales growth and 15% earnings increases long-term.

Ross' most recent financial performance has been outstanding. In the third quarter ended Nov. 1, sales rose 20% to $483 million vs. the year before, with same-store sales up 12%. Net income rose a whopping 53% to $25.1 million, or 50 cents a share.

Nine-month sales also were up 20%, to $1.4 billion. Same-store sales rose 12%, with net income jumping 57% to $76.8 million.

Not surprisingly, analysts are enthusiastic. New York-based Merrill Lynch & Co. retail analyst Marni Shapiro predicted that Ross would earn $2.30 a share in the fiscal year that ended in January -- a gain of 46% -- with revenues set to increase 18% to $2 billion.

"We estimate comp sales will increase 10% on top of a strong gain of 13% a year ago," she said in December. "Ross has been able to generate strong same-store sales increases despite the tough comparisons faced throughout the year. This reflects a maturing buying organization, continually improving merchandise and brand assortments, and a consistent focus with regard to real estate, enabling the company to be dominant in its key regions."

Richard N. Baum, retail analyst for Goldman Sachs, New York, was equally impressed.

"Ross Stores' focused growth in existing markets and its maintenance of remarkably stable levels of in-store and per-store inventories have resulted in outsized leverage over buying, occupancy, central overhead and store-level expenses," he said. "Managing expenses to conservative same-sore sales assumptions has magnified earnings growth over the past five quarters, as same-store sales have increased 9% to 14%, well ahead of expectations."

Success, however, did not come easily. From 1991 through 1995, Ross struggled to tap into a winning strategy. Sales rose fairly steadily, but profits wallowed after reaching $43.7 million (4.7% of sales) in fiscal 1991. Earnings came back to $43.3 million in 1995, but was only 3% of sales. But 1996 was a breakthrough year, as the bottom line hit $80.9 million and 4.8% of sales.

That period was difficult for the entire off-price industry, with some casualties and industry changes, the most dramatic example being the Marshalls takeover by TJX Cos., the parent of T.J. Maxx and Hit or Miss stores.

Ross appears secure for now. But it faces some risks, including a possible increase in price promotion by department stores that could erode Ross's favorable price gap; possible stiffening competition from both large off-price and small regional competitors; and, of course, an economic slowdown in California, Ross' core state. None of these possibilities appears very likely, however, and observers are even beginning to believe that Ross' superior 8% operating margin could creep up to 9%-plus in the new fiscal year.