EUR 850.00 For Business Accounts Only

Morningstar | Amid improved retail conditions, Ross continues to deliver growth through its value-oriented model.

Off-price retailers like Ross Stores have increased their customer bases throughout the recession and weak recovery. This has come primarily at the expense of other apparel retailers, with department store retail sales down almost 3% in 2017, compared with 10% revenue growth (and a 4% same-store sales increase) for Ross. Despite improved conditions for conventional retailers thus far in 2018, we think consumers have become more price-oriented and willing to trade customer service and an expensive store design for 20%-60% discounts on the same brand-name merchandise. With limited growth in consumer spending on apparel, we think Ross will maintain its new market share and benefit from suppliers' excess inventory.We have awarded Ross a narrow moat rating because we believe that success in the off-price retailing model requires significant scale to support a large buying force, warehousing, and distribution. Additionally, Ross' proprietary inventory management system allows for merchandise to be differentiated for local preferences, providing a powerful intangible asset and enabling the company to target a broad market. As such, we think Ross is slightly protected from the intense competition of more traditional retailers and can sustain higher-than-average growth.Management has strategically executed its growth strategy, opening clusters of new stores in markets to take advantage of operational efficiencies. Because the company operates in only 38 states (as well as the District of Columbia and Guam), we think plans to expand the store base to 3,000 (versus 1,622 in 2017 and raised from 2,500 in late 2018) are reasonable.We view Ross as a compelling long-term idea in the apparel retail space. Over the next five years, we think the company can achieve 6% average annual revenue growth on 2% comparable sales and a 6% increase in stores. We expect wage inflation to be a headwind in the near term but to eventually moderate.