University of South Florida

College of Engineering

Department of Industrial & Management Systems Engineering

Ross Stores Inc.

EIN 6183 Engineering Management Policy and Strategy

Fall 2014

Roberto Serrano

TABLE OF CONTENTS

EXECUTIVE SUMMARY 5

COMPANY OVERVIEW 6

HISTORY 7

KEY METRICS 8

PRODUCTS 10

INDUSTRY COMPETITION 12

COMPETITORS 12

CUSTOMERS 13

EXTERNAL COMPETITION 14

BARRIERS TO ENTRY 14

SUPPLIERS 14

CRITICAL SUCCESS FACTORS 15

EXTERNAL ENVIRONMENT 16

Political and Legal Forces 16

Economic forces 17

Social forces 17

Technological forces 18

ETHICS AND CORPORATE SOCIAL RESPONSIBILITY 18

Empowering our associates 19

Supporting our communities 19

Operating sustainably 20

Conducting business ethically 20

BUSINESS STRATEGIES 21

FUNCTIONAL STRATEGIES 22

Marketing 22 Price 23 Promotion 24 Product 25 Place 26

FINANCE 29

PRODUCTION 30

PURCHASING 31

HUMAN RESOURCE MANAGEMENT 31

INFORMATION SYSTEMS 31

STRATEGY FORMULATION 32

STRATEGY EXECUTION: STRUCTURE, STRATEGIC CHANGE, CULTURE AND LEADERSHIP 34

COMPARISON WITH THE GAP, INC., INC 36

CONCLUSIONS 38

List of tables

TABLE 1: REVENUES 9 TABLE 2: PRODUCT CATEGORIES 10 TABLE 3: PRODUCTS 11 TABLE 4: WORKING ENVIRONMENT CONTRIBUTIONS 19 TABLE 5: IVA REPORT 2013 21 TABLE 6: SWOT MATRIX 33 TABLE 7: COMPARISON BETWEEN THE THE GAP, INC., INC. AND ROSS STORES, INC 36 TABLE 8: FINANCIAL COMPARISON BETWEEN ROSS STORES, INC. AND THE GAP, INC. 37

List of figures

FIGURE 1: STORE DISTRIBUTION 7 FIGURE 2: TOTAL REVENUES IN FY2013 10 FIGURE 3: MARKET SHARE 13 FIGURE 4: CORPORATE SOCIAL RESPONSIBILITY 18 FIGURE 5: PRICE TAGS IN ROSS STORES 23 FIGURE 6: PROMOTIONS THROUGH ROSS STORES FACEBOOK PAGE 24 FIGURE 7: ROSS DRESS FOR LESS STORE FACADE 27 FIGURE 8: DD'S DISCOUNTS STORE FACADE 28 FIGURE 9: ROSS STORES, INC. EXECUTIVES 35

Executive Summary

The following report describes strategic elements of the Ross Stores, Inc. in

terms of external environment, organization details and the process of strategy

formulation and execution. The company operates within the US family clothing industry

and its external environment has been analyzed through both, Michael Porter’s five

forces and PEST (Political, Economic, Social and Technological forces).

Ross Stores, Inc. is an off-price retailer of apparel and home fashion with two

business units, Ross dress for less and dd’s Discounts. Both units operate in the same

industry targeting a slightly different market. Therefore, some strategies are analyzed

considering each brand individually. Strategy formulation includes the SWOT analysis

and the assessment for current and potential strategies.

Several of the company’s financial ratios and strategic elements are compared

with one relevant competitor in the family clothing industry to describe even more the

competitive position of Ross Stores, Inc.

Conclusions are presented at the end of the report and include some

recommendations and comments related to the competitive position of the company

within the industry and the potential strategies to enhance its future performance.

Company Overview

Ross Stores, Inc. is an off-price retailer of designer apparel, footwear,

accessories and home fashions for the entire family. The company´s headquarter is

located at Pleasanton, California. The target customers of the company are mainly

value-conscious women and men between the ages of 18 and 54. There are two chains

of stores within the Company, Ross Dress for Less that target customers from middle

income households and dd’s Discounts with similar product portfolio but concentrated on

moderate income households. The website of the Company is designed to provide

stores locator search and special offers to customers. The mission of the company is not

clearly stated on the website or in its annual report. Nevertheless, according to the

International Directory of Company Histories (1997), “Ross Stores' mission is to offer

competitive values to its target customers by focusing on the following key strategic

objectives: achieve an appropriate level of brands and labels at strong discounts

throughout the store; meet customer needs on a more regional basis; deliver an in-store

shopping experience that reflects the expectations of the off-price customer; and

manage real estate growth to maintain dominance or achieve parity with the competition

in key markets”.

Locations

The Company’s first chain is Ross “Dress for Less” with 1.146 locations in

February 2013 (Ross Stores, Inc. 2013 Annual Report), making it the largest off-price

apparel retailer in the United States as shown in Figure 1. (p. 8).

Figure 1: Store distribution

Source: Ross Stores Inc., 2013

History

According to International Directory of Company Histories (1997), Ross Stores

was incorporated in California in 1957 with the name of Ross junior department store;

however, is in 1982 when the Company, as we know it today, was born. During that

year, two entrepreneurs, Stewart Moldaw and Donald Rowlet, bought the 6 stores chain

with help from venture capital partners. Since the beginning, they had clear intentions to

build a retail empire, and only three years later they had a 107 stores growing retail

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CaliforniaTexas

FloridaArizonaGeorgia

Pennsylvania Washington

Illinois North Carolina

Virginia Nevada

TennesseeOregon

Colorado Maryland

South CarolinaAlabama

Oklahoma Hawaii

Utah Missouri

Louisiana New Jersey

Idaho New Mexico

Mississippi Montana Arkansas

Kansas Kentucky

Indiana Wyoming Delaware

DCGuam

chain. In 1985, the company went public trading on NASDAQ under the ROST symbol,

and starts an aggressive expansion by increasing its number of stores, distribution

centers and product portfolio. In 1992, the company added the department of home

accents featuring, fine china, glassware, framed art and ceramics. (Chapter about

Company’s history). Their current website, www.rossstores.com, was launched in 2000

with relevant information regarding investment, customer’s relationship and job

opportunities. In 2004, the company launched dd´s Discounts as a new concept for

lower income consumers.

Key metrics

Ross stores reported on its 2013 Annual Report a total of 17.400 full-time

employees (p.15) and the Company is currently ranked # 277 in the Fortune 500 (Ross

Inc, Investors Overview 2013, p.3). Its customers are between 75% to 80% females

shopping for themselves or for other family members (Ross Inc, Investors Overview

2013, p.8) and belong to middle income households (Ross Stores, 2013 Annual Report,

p. 12). In 2013, it overcomes the 10 billon revenue barrier (Ross Inc, Investors Overview

2013, p.3) and the last three years financial performance could be resumed as follows:

Table 1: Revenues

2013

1

2012

2011

Sales

Sales (millions) $ 10,230

$ 9,721

$ 8,608

Sales growth 5.2% 12.9% 9.4% Comparable store sales growth (52-week basis) 3% 6% 5%

Costs and expenses (as a percent of sales)

Cost of goods sold 72.0% 72.1% 72.5% Selling, general and administrative 14.9% 14.8% 15.2%

Interest (income) expense, net —

0.1% 0.1% Earnings before taxes (as a percent of sales) 13.1% 13.0% 12.2%

Source: Ross Stores Inc., 2013

¹Fiscal 2012 was a 53-week year; all other fiscal years presented were 52 weeks.

Even though, the annual growth is decreasing from previous years, the company

has a consistent increase on the revenues through the last 30 years (Ross Inc, Investors

Overview 2013, p. 21). The main reason the management present for this, was the

constant utilization of proven strategies.

Net earnings (as a percent of sales) 8.2% 8.1% 7.6%

Products

During 2013, the company generated revenues through the following product

categories:

Table 2: Product categories

Product Category Percentage of the total revenues in FY2013

Ladies 29% Home accents and bed and bath 24% Accessories, lingerie, fine jewelry and fragrances 13% Shoes 13% Men´s 13% Children's 8%

Source: Ross Stores Inc., 2013 Figure 2: Total revenues in FY2013

Source: Ross Stores Inc, Investor Overview, August 2014

29%

24%13%

13%

13%8%

Percentage of the total revenues in FY2013

Ladies

Home accents and bed and bath

Accessories, lingerie, fine jewelry and fragrances

Shoes

Men´s

Managing an effective portfolio is critical for every company within the family

clothing stores industry. Ross Stores is very active in following trends and identifying

the additional customer needs. The entire product portfolio of the company is

described in the following table.

Table 3: Products

Apparel and fashion accessories Home decor products Educational toys and games Fragrances Jewelry Footwear Furniture Gourmet food and cookware Home accessories Lingerie Luggage Sporting goods Watches Kitchen Dining Bedding products Bath products Kid’s wear Baby shower gifts Garden Décor Source: Ross Stores Inc., 2013

The ladies segment accounts for 29% of the total revenues in contrast to the men

section which only accounts for 13% (Ross Inc, Investors Overview 2013, p.6). Men and

women apparel can be divided in formal and casual wear; formal typically includes

pieces like suits, blazers, tailored pants and coats, while casual include jeans, shirts,

shorts, running pants and others.

Industry Competition

The family clothing retail US industry (NAICS 448140) is considered mature

within its life cycle mainly because the companies’ procedures are standard and the

revenue grows at the same pace of the economy. This industry value added (IVA),

which measures “the industry´s contribution to the economy, is expected to grow 2.9%

on average per year until 2019, compared to GDP growth of 2.5% per year” (Rivera,

2014, p. 12). The difference is explained by the fact that after the 2009 recession the

industry has made relevant improvements and is expected to remain in the same track

for the next years.

Competitors

The concentration level of the industry is moderate. Is expected that top four

competitors consolidated revenues will account in 2014 for 43.5% (Rivera, 2014, p. 23)

of total industry revenue (Figure 3). Nevertheless, considering the relevance, only 3

main competitors where considered in this analysis, TJX Companies Inc., THE GAP,

INC. Inc. and Ross Stores Inc. On one hand, the first two companies target price-

conscious customers through their low in-store prices, which is the fact that helped

these companies to thrive during recession. On the other hand, THE GAP, INC. Inc.

targets more fashion-conscious customers relying on its existing well positioned brands

to sale products in all price ranges.

Figure 3: Market Share

Source: Rivera, IBIS World, 2014

The family clothing stores are generally located in metropolitan areas and more

concentrated in states like California, Florida and Texas. However, due to the increase

on the online sales, the location for stores is shifting to follow other facts such as

operational costs.

Customers

The customers in this industry are normally sensitive to price changes; however,

comfort and variety are also very important. Higher prices are often related to brands

carrying positive consumer perceptions. Moreover, the stores within this industry are

competing with the stores located under the same area of influence, in which customers

tend to favor those stores near home, unless they are looking for a specific item or

brand.

14.8

13.7

11.1

3.9

56.5

Market share

The TJX Companies Inc.

GAP Inc.

Ross Stores Inc.

Abercrombie & Fitch Co.

Others

External Competition

There are many important competitors assigned to different industries, On one

hand, the stores specialized in specific market segments such as men’s clothing stores,

women’s clothing stores, children’s and department stores. These stores compete

against the family clothing stores in selection and price. On the other hand, the Internet-

based retailers allow customers to buy a wide variety of products at competitive prices

without leaving their homes.

Barriers to Entry

There are some important barriers to entry to this Industry. One is the highly cost

related to develop and maintain a brand reputation; most of the successful existing

competitors invested great time and resources to gain a strong brand name. Other

barrier is the established sourcing networks. For instance, during the recession, Ross

Stores was able to purchase products earlier in the season at discounted prices and

offer them more competitively. For new entrants would be very difficult to offer

competitive prices without having access to these sourcing networks.

Suppliers

The company has a great quantity of suppliers, strengthening its position to select

and manage the negotiation. Even though, there are many social and environmental

risks involved in the supply chain, the company has a clear policy to avoid those

suppliers that are involved in the use of child, slave, prison or forced labor. Moreover,

the company has a network of 7,900 merchandise suppliers to serve the demand

originated in Ross Dress for less and dd’s Discounts stores (Canadean, 2014, p. 15).

Critical success factors

Inventory Management: This is critical for almost every retail company, and it is getting

more important considering the challenges emerging from the on-line demand.

Market Position: The image of the company is proportional to the demand and the flow

of people going to the stores. If the message sent to the market is clear and consistent,

better outcomes are expected.

Brand names: The brands displayed in the stores are as important as the store name

itself.

Production planning: It is also critical to have the products people want at the right

moment. For instance, to THE GAP, INC. is clear how build their own brands gives them

the opportunity to be consistent with the seasonal offers.

Qualified Workforce: Stores are always trying to acquire customer’s fidelity or at least

retain them as much as possible. Currently, the human interrelations are still very

important to enhance the shopping experience.

External Environment

Political and Legal Forces

The company is based entirely in the US. Therefore, almost any important

geopolitical change could affect its performance. However, some legal forces are most

likely to affect the short term financial results.

First, the increase in manpower costs in the United States may have a negative

effect in Ross Stores, mainly because it would affect a big portion of over 17,400 full-

time employees and 48.900 part-time employees (Ross Inc, 2013 Annual Report, p. 15).

The federal minimum wage provisions are contained in the Fair Labor Standards Act

and depending on the State, the current rate could vary between $8 and $10 dollars per

hour (Canadean, 2014, p.18).

Second, the company may be affected as a result of changes in effective actions

and regulations against counterfeit products. The penetration of counterfeit merchandise

decreases the company sales and products with fake labels affect the consumer

confidence and damage the genuine brand image. The International Chamber of

Commerce in 2014 estimated that global economic and social impacts of counterfeiting

and piracy are expected to reach US$2 trillion by 2015 and International trade in fakes is

expected to increase to $ US$960 billion by 2015 (Canadean, 2014, p.18).

Finally, some regulations can affect indirectly the company through its contractors

or other companies related to its supply chain. In December 2012, the “US department

of Labor´s Wage and Hour Division and the California Division of Labor Standards

Enforcement uncovered various labor violations during an inspection of ten garment

contractors in California” (IVA Report, MSCI, 2013, p.9). It was further stated that one of

the companies that sourced the contractor’s merchandise was Ross Stores Inc.

Economic forces

Many economic factors can affect the consumer disposable income and

consumer confidence. According to the 2013 Company´s Annual Report, some of those

are interest rates, recession, inflation, deflation, energy costs, tax rates and policy,

unemployment trends, and fluctuation commodity costs (p.16). Nevertheless, the

increase on the disposable income could also affect adversely to Ross Stores: “A focus

on fashion rather than function will also play a role in consumer decisions when making

purchases from family clothing stores. Well-established, branded stores will likely

experience a surge in sales, while revenue from competitively priced retailers like Ross

may stagnate” (Rivera, 2014, p. 9). This specific fact could benefit some competitors

more fashion-oriented like THE GAP, INC. Inc.

Social forces

It was stated before that over 75% of the company’s customers are women

buying merchandise for the entire family. This is a critical fact that the company takes in

account to develop new markets and build new stores. Furthermore, the number of

adults between the ages 20 and 64 years old are expected to grow, and since women’s

clothing accounts for the bulk of industry revenue, it makes women over the age of 20

and less than 65-years-old the key market for industry operators. Any shifts in this group

are likely to adversely demand for industry products (Rivera, 2014, p.14).

Technological forces

Many technological advances are helping the family clothing retail industry to

enhance different functions; these improvements are commonly performed in security,

inventory management and labor management. Centralized systems are used to

monitor the supply chain management and they are combined with barcode and radio

frequency identification (RFID) technology to make processes more efficient. According

to Rivera (2014), “Ross Stores has a labor management system that tracks in-store

labor against budget and forecasts to determine if resources are being allocated

correctly and if adjustments need to be made” (p.28).

Ethics and Corporate Social Responsibility

The Ethics and Corporate Social Responsibility of Ross Stores is depicted on four

areas in which they focus their policy and initiatives, empowering our associates,

supporting our communities, conducting business ethically and Operating sustainably.

Figure 4: Corporate Social Responsibility

Source: Ross Stores Inc., 2013

Empowering our associates

They claim to provide a working environment for their employees to grow and

contribute to their own community. The initiatives they performed in behalf this area are

described in the following table:

Table 4: Working environment contributions

• Training and development programs • Advancement opportunities • A commitment to diversity • Volunteering in the community • A scholarship program for associates and their children • Competitive benefits and total rewards package • A safe work environment • Inviting feedback regularly • Hiring in our communities • Military recruiting program

Source: Ross Stores Inc., Corporate Social Responsibility Overview, 2014

Supporting our communities

The company works with local and national organizations to support the

communities focusing in building academic achievement and life skills for young people.

Some of Ross Stores community partners are: Boys and Girls Clubs of America, First

Book, American Heart Association and American Red Cross (CSR Overview, 2014,

p.10).

Operating sustainably

The company is empowered with efficiency and sustainability to become

responsible corporate citizens, lower costs and deliver the expected value to the

company´s customers. Some of the operating sustainably initiatives within this field are:

sustainable product transportation, energy efficiency at the stores and distribution

centers, reduction of waste and increase of the company’s efficiency sustainability at the

headquarters (CSR Overview, 2014, p.19-26).

Conducting business ethically

Regarding to this field, the company acknowledge the risks involved in being part

of such complex supply chain environment. Moreover, they create a specific policy

stated as follows: “This focus on ethical business practices is also reflected in Ross’

policy that we will not knowingly purchase merchandise from any manufacturer involved

in the use of child, slave, prison or forced labor” (CSR Overview, 2014, p.27).

Nevertheless, they claim to source their products from diverse suppliers always trying to

build long-lasting relationships.

Finally, in order to have a different and independent perspective, a private

assessment must be consulted. According to the MSCI ESG (environmental, social and

governance) Research, the company’s Intangible Value Assessment (IVA) is BB and the

component ratings are the following:

Table 5: IVA Report 2013

IVA Report (ESG pillar performance) Score Industry Percentile Environmental 4.0 34th Social 3.8 47th Governance 10.0 64th Source: ESG IVA report 2014

Regarding the assessment, the company has low exposure to the reputational

risks associated with violations in supply chain labor codes and raw materials concerns.

However, due to their products origin, Ross Stores has limited capacity of mitigate

carbon footprint of products aggregated through the supply chain. The only initiative to

reduce the carbon footprint recognized within the assessment is the basic energy

management performed at its stores and distribution centers. There are some risks

mentioned related to the lack of employee engagement channels, such as union

membership or employee council. Nevertheless, the research couldn’t find any notable

concern about audit practices and they considered the Ross Stores corporate

governance structure to be moderately strong.

Business Strategies

While the corporate strategy of Ross Stores Inc. is based primarily on internal

growth oriented to the domestic market, the business strategy in terms of Porter’s

Generic Strategies, is best described as a focus-low-cost strategy. Moreover, the

Company focuses on off-price apparel and home fashion, and for dd’s Discounts’ stores

the focus is on a younger segment with moderate income level and less brand oriented.

Therefore, the strategies implemented emphasize low overall purchasing costs while

serving the specific off-price segment within the United States market.

Furthermore, in terms of the Miles and Snow strategy framework which considers

four strategic types (prospectors, defenders, analyzers and reactors), the Company’s

strategy is clearly identified as analyzer because they imitate or respond prospectors

while maintaining efficiency in operations. Moreover, by offering off-price products, Ross

Stores Inc is seeking a second mover advantage.

Even tough, Ross Stores Inc. adopted the same generic strategy than other

competitors by comprising the clothing off-price strategic group; the Company applies

multiple functional strategies. The most visible strategy that reveals the intention to

differentiate from its competitors is emphasizing the treasure hunt of fashion brands or

enhancing the merchandising capabilities.

Functional strategies

For both business units, Ross dress for less and dd’s Discounts, the functional

strategies are similar and executed on a centralized manner. Moreover, since the

difference between Ross dress for less and dd’s discounts is the target market, only the

marketing strategies are particularly different for each business unit.

Marketing

The Company’s marketing always seek to communicate the message, great

brands at great values every day and it is well directed to their primary customers, which

according to their investors report are mostly women (75-80%), shopping for herself or

for other family members. Their customers depending on the household incomes could

be typically wanting or needing a bargain. The specific strategies are described in the

Investors Overview Report (2014) using the four Ps, price, promotion, product and

place.

Price

The price is emphasized on each product tag by comparing to a supposed retail

normal price and the average mark down for the entire product mix is normally between

27% and 28% (See Table 1). The difference between the “normal retail price” and the

price offered is one critical fact to motivate the treasure hunt among their customers.

Figure 5: Price tags in Ross Stores

Source: Google, 2014

Moreover the gross margin of the company has increased during the past few

years due to better buying and faster inventory turns as a consequence of the reduction

of selling store inventories.

For the specific case of dd’s Discounts, the assortments feature more moderate

brands and fashions for the family and home but at lower average price points than

Ross dress for less.

Promotion

The Company uses a wide variety of methods to promote its brand and offers

such us TV, radio, newspaper, btl media and social media. Nevertheless, according to

their Investors Overview Report (2014) the most effective medium to reach its customers

encouraging more frequent shopping and creating awareness is the Television (p.8).

The message is consistent with the business strategy and, as we can see on the

announcements posted on the Company’s facebook page, they used a lot the concept

of “treasure hunt” or “bargain hunter” during the past months. They also use frequently

fashion dressed women and communicate holyday’s sales to enhance the seasonality

impact. Some examples of the promotion strategy can be seen on the following pictures:

Figure 6: Promotions through Ross Stores Facebook page

Source: Ross dress for less facebook page

Product

The composition of products in terms of categories is described on Figure 2 and

Table 3. The same composition applies for both business units with the only difference

that Ross dress for less targets more brand oriented customers by offering well known

brands in contrast to dd’s Discounts which emphasizes the value of the products for

moderate household income customers. Nevertheless, the quality and characteristics of

the entire product mix offered in both business units highly depends upon the vendor’s

network and the purchasing strategy that will be described further on.

For instance Ross dress for less carries products that you might find at Dillards or

Macys, while dd’s Discounts carries products that you might find at Sears or Wallmart.

(Mannes, 2012)

Place

The company has distribution centers strategically located in Southern California,

Central Pennsylvania and South Carolina to minimize transportation costs and lead time

from the orders the company place to its vendors. Nevertheless, the company

acknowledges the merchandise transportation as a significant part of its environmental

footprint (CSR Report, 2014). Therefore, even though the transportation is outsourced,

Ross Stores Inc. employs several strategies to reduce costs and make product

transportation more sustainable. First, they ship more than 25% of their products by rail

and over 75% the outsourced partners participate in the SmartWay Transport

Partnership, which is a U.S. Environmental Protection Agency program developed to

reduce air pollution and improve fuel efficiency. Second, the Company combine and

optimize truck loads for reduce the number of truck on the road. Finally, the trucks’

millage is reduced also by adjusting store deliveries on a day-to-day basis (CSR Report,

2014, p. 22).

The number of stores is approximately 1.300 (Ross and dd´s discounts) located

in 33 states (figure 1) and each business unit has some strategic features.

Figure 7: Ross dress for less store facade

Source: Investors Overview Report, 2014

In one hand, Ross dress for less has an efficient, low-cost format of 25.000 to

30.000 square feet in suburban centers. The self-service format stores are located in

visible and accessible retail locations with a large proportion of middle income

households (Investors Overview Report, 2014, p.9).

Figure 8: dd's Discounts store facade

Source: Investors Overview Report, 2014

On the other hand, dd’s Discounts is typically located within areas populated by

younger customers with more moderate income levels than Ross dress for less. The

format is still self service and cost-efficient, however the size is slightly smaller (20.000 –

25.000 square feet and a larger children’s department (Investors Overview Report,

2014, p. 10).

According to the Company’s business strategy, potential locations are being

identified to increase the number of stores up to 2.500 units within the United States,

where 2.000 stores correspond to Ross dress for less and 500 to dd’s Discounts

(Investors Overview Report, 2014, p. 13). This potential growth would double the size of

the existing store base and is considered for the long term.

Finance

The financial position of the company has been acknowledge by many investors

especially for the return to the stockholders. In 2013, Ross Stores Inc. ranked # 38

among the Fortune 500 for total return to stockholders on a 10-year (20%) basis

(investors). The principal ratios of the Company are described as follows:

Source: Ross Stores, Inc., 2014, Mergent Online website

Company Financials

Ratios

Profitability Ratios 02/01/2014 02/02/2013 01/28/2012 01/29/2011 01/30/2010ROA % (Net) 22,19 22,2 20,54 18,91 17,33ROE % (Net) 44,49 47,49 46,64 44,68 41,23ROI % (Operating) 66,11 70,29 68,23 65,17 59,35EBITDA Margin % 15,14 14,99 14,21 13,57 12,24Calculated Tax Rate % 37,67 37,8 37,6 38,15 38,38Revenue per Employee 154728 166328 160147 159348 157981

Liquidity RatiosQuick Ratio 0,36 0,5 0,52 0,65 0,68Current Ratio 1,34 1,43 1,43 1,51 1,47Net Current Assets % TA 12,17 16,59 17,52 22,17 20,04

Debt ManagementLT Debt to Equity 0,07 0,08 0,1 0,11 0,13Total Debt to Equity 0,07 0,08 0,1 0,11 0,13Interest Coverage - 184,12 103,03 94,74 95,63

Asset ManagementTotal Asset Turnover 2,71 2,74 2,69 2,68 2,81Receivables Turnover 167,86 173,16 179,4 176,03 168,7Inventory Turnover 5,97 5,99 5,63 5,85 6,08Accounts Payable Turnover 12,93 12,19 11,29 11,06 12,06Accrued Expenses Turnover 43,06 39,06 35,7 34,8 37,03Property Plant & Equip Turnover 6,09 6,99 7,76 8,19 7,6Cash & Equivalents Turnover 19,18 14,75 11,64 9,85 13,22

Per ShareCash Flow per Share 4,81 4,4 3,64 2,86 3,62Book Value per Share 9,41 8 6,58 5,64 4,71

It is important to mention that profitability ratios such as ROA (22.19%) and

EBITDA (15.14%) show a good performance after the recession. As it is described

above, both increase consistently from 2010 to 2014.

Perhaps one of the lowest relative ratios the company has is Debt to Equity (0.07

vs. 0.46 of THE GAP, INC.), which is explained by considering the low leverage the

Company has upon external sources. The inventory turnover, 5.97 is average within the

industry (THE GAP, INC. 5.35) and it is a good ratio for retail assessment revealing that

Ross Stores, Inc. rotates its inventory every two months.

The Net current assets ratio (12.17) is low in comparison to other competitors

such as THE GAP, INC. (25.29). Nevertheless, Ross Stores does not show any liquidity

problem and it is being systematically reducing the inventory levels without affecting the

stores sales performance. Moreover, its financial plans are considered to increase the

capital expenditures on infrastructure and new stores according to the expansion plan

Furthermore, for FY 2014, the capital expenditures are expected to increase to

approximately $800 million in order to finance new stores and other infrastructure

investments such as, the New York Buying Office building. It will enable Ross Stores

Inc. to house all the New York Company’s merchants together increasing the

effectiveness of this strategic function (Ross Stores Inc, 2013 Annual report, p.6 ).

Production

Ross Stores, Inc. does not produce their products by itself and the majority of the

apparel, footwear, accessories and home fashions are purchased from suppliers after

they have been produced or imported in response to other retail chain’s orders.

However, a small portion of merchandise is ordered directly through the Company’s

international buying agents. For these particular items, there are additional quality

requirements.

Purchasing

One of the strengths the Company has is its purchasing function. The company’s

buyer’s objective is to get the right goods to the right stores at the right time; that is why

people, process and technology are in continuous assessment and improvement to

increase the purchasing performance. The buyer´s offices are strategically located in

New York City and Los Angeles to buy closeouts and cancelled orders. This is probably

the clearest evidence of the company using the second mover strategy.

Human Resource Management

Another clear objective of the company is to embrace diversity. The workforce is

consists of people with a range of economic and ethnic background; currently, 72

percent of our associates are people of color and 77 percent are women (CSR, 2014, p.

6).

Information Systems

As it was stated before, technology and information systems are critical for the

inventory management and the purchasing function. Furthermore, Ross Stores

developed a system to perform a strategy they named micro-merchandising. The

purpose of this strategy is to drive better product allocation and increase the margins.

The results can be seen on Table 1.

Another relevant information system Ross Stores is utilizing to improve stores’

performance is a labor management system that tracks in-stores labor against budget

and forecasts in order to evaluate the correct allocation of human resources.

Strategy Formulation

Perhaps the best and more used tool to formulate strategies is the SWOT

Analysis. Identifying the strengths, weaknesses, opportunities and threats enables

management to formulate realistic and effective strategies. The SWOT analysis for Ross

Stores, Inc. contains the following elements:

Strengths

1. Off-price business model helps deliver significant bargain

2. Better inventory management leading to gross margin expansion

3. Effective sourcing strategy coupled with strong vendor relationships

4. Pricing policy

Weaknesses

1. Lack of presence in e-commerce platform

2. Concentrated presence in the U.S.

Opportunities

1. Expansion to penetrate into the US

2. A shift in the behavior of shoppers towards low-priced branded products

3. Overseas market

Threats

1. Intense competition in the retail environment

2. Regulations concerning the quality and safety of products

3. Increase in operating cost due to rising labor

4. Increase in counterfeit products

Using the most relevant elements we can identify some alternatives to take into

consideration as courses of action to Ross Stores Inc. These alternatives are described

on the following SWOT matrix.

Table 6: SWOT Matrix

Source: Ross Stores, Inc. Market line webpage, 2014

The pros and cons for these alternatives are:

Alternative 1: Expand the existing base of stores through other states and locations to

saturate the U.S. demand. This is the strategy the company is being performing

consistently for the last years. Saturating a big and profitable market such as the U.S., is

always more safe than expanding overseas. However, other competitors would start to

Opportunities Threats

1. Expansion to penetrate into the US1. Intense competition in the retailenvironment

2. A shift in the behavior of shopperstowards low-priced branded products

2. Regulations concerning the quality and safety of products3. Increase in operating cost due torising labor

Strengths 1. Off-price business model helpsdeliver significant bargain 2. Better inventory managementleading to gross margin expansion3. Effective sourcing strategy coupled with strong vendor relationships

Weaknesses1. Lack of presence in e-commerce platform

Alternative 1: Expand the existing base of stores through other states andlocations to saturate the U.S. demandAlternative 2: Expand operations in new countries where the shopping behavior could be similar and sourcing strategy remains competitive.Alternative 3: Integrate a proved succesful e-tailer company to compite onthat market

SWOT MATRIX

develop a strong presence on other countries such as the BRIC group building potential

barriers for Ross Stores to enter.

Alternative 2: Expand operations in new countries where the shopping behavior could be

similar and sourcing strategy remains competitive. Since the company has proved

sourcing capabilities and great efficient inventory management system, it could be great

to explore other country’s markets. Nevertheless, some additional costs, research and

political risks would interfere during this course of action.

Alternative 3: Integrate a proved successful e-tailer company to compete on the digital

market. Worldwide tendency is clear related to e-commerce. Not entering to this market

could be a threatening to the Company’s future. Moreover, since many companies are

showing great operational performance as apparel e-tailers, the transition to this new

segment could be smoothed using an integration strategy. The integration has many

risks and also could affect negatively Ross Stores, Inc. image.

Perhaps, the best course of action for the Company at this moment is to continue

with the expansion strategy through the U.S. market before start overseas expansion.

However, some efforts are recommendable to evaluate and execute Alternative 3. The

e-commerce is too relevant to avoid consider it in the short term.

Strategy Execution: Structure, Strategic Change, Culture and Leadership

The organizational structure of Ross Stores, Inc. has been conducted on a very

consistent way due to its experienced Board of Directors and Officers. Both, the

President of the Board and the CEO have a vast corporate experience and their tenure

is over 20 years within the Company.

Figure 9: Ross Stores, Inc. Executives

Source: Mergent online webpage

During 2014, Barbara Rentler became the Chief Executive Officer of the

Company and Michael Balmuth become the Executive Chairman of the Board and

keeps playing an integral role on the senior management team (Market watch, 2014).

The fact that management continues executing similar corporate strategies and

keeps avoiding the integration into potential markets such as, e-comerce, is a sign of an

inert culture. Nevertheless, Ross Stores, Inc is been characterized by strong values like

consistency, reliability and commitment to the employees and society.

Furthermore, some changes have been performed during the last years related to

the implementation of information systems and enhancing dd’s Discounts performance.

However, the Company does not show a strong intention to generate disruptive

changes.

James S. Fassio Title : President Tenure : 26 Age : 59 Total Compensation : $4,043,561 %Change : 0.03 Status : Active Michael Balmuth Title : Executive Chairman Tenure : 25 Age : 63 Total Compensation : $6,231,026 %Change : -0.43 Status : Active

Barbara Rentler Title : Chief Executive Officer Tenure : 28 Age : 56 Total Compensation : $4,828,713 %Change : -0.02 Status : Active

Comparison with THE GAP, INC., Inc

The Gap, Inc. is a very large company operating within the Global Clothing

Industry founded in 1969 and headquartered in San Francisco California. It

manufactures numerous products for a very broad customer base.

In one hand, the most relevant strength The Gap, Inc. has, is its strong brand

recognition that enables the company to manufacture and sale with flexibility gaining a

wide geographic presence. In the other hand, Ross Stores, Inc does not have a strong

brand to manage and therefore, their position within the customer’s minds depends

upon the variety and quality of the products they purchase.

A second critical difference between the two competitors is the strategic approach

at a business level. While Ross Stores, Inc has a focus-low-cost strategy, The Gap, Inc.

relies on Differentiation to meet the company’s goals.

Furthermore, as described in the following table, differentiation allows The Gap,

Inc. to offer its products with better margin than Ross Stores, Inc.

Table 7: Comparison between The The Gap, Inc., Inc. and Ross Stores, Inc

Source: Mergent Online webpage, 2014

Company Name Revenues Gross Margin Net Income Employees Share Price

The Gap, Inc. $ 16.148.000.000 38,97 $ 1.280.000.000 137000 39,85

Ross Stores, Inc. $ 10.230.353.000 28,05 $ 837.304.000 17400 90,28

FY 2013

Finally, reviewing the financial ratios of both companies (Table ), Ross Stores,

Inc. appears to be more profitable since its ROI was 66.11 compare to 50.14 for The

Gap, Inc.. However, The Gap, Inc. has better liquidity ratios considering a higher level of

inventories worldwide. In terms of debt management, there is a big difference due to the

fact The Gap, Inc. has a strong external financial sources’ leverage.

Table 8: Financial comparison between Ross Stores, Inc. and The Gap, Inc.

Source: Mergent Online website

Financial Comparison

RatiosROSS THE GAP

Profitability Ratios 02/01/2014 02/01/2014ROA % (Net) 22,19 16,76ROE % (Net) 44,49 43,1ROI % (Operating) 66,11 50,14EBITDA Margin % 15,14 16,59Calculated Tax Rate % 37,67 38,84Revenue per Employee 154728 118192

Liquidity RatiosQuick Ratio 0,36 0,8Current Ratio 1,34 1,81Net Current Assets % TA 12,17 25,29

Debt ManagementLT Debt to Equity 0,07 0,45Total Debt to Equity 0,07 0,46Interest Coverage - 38,38

Asset ManagementTotal Asset Turnover 2,71 2,11Receivables Turnover 167,86 40,84Inventory Turnover 5,97 5,35Accounts Payable Turnover 12,93 13,57Accrued Expenses Turnover 43,06 35,78Property Plant & Equip Turnover 6,09 6,02Cash & Equivalents Turnover 19,18 10,9

Per ShareCash Flow per Share 4,81 3,71Book Value per Share 9,41 6,87

Conclusions

The entire strategic process of Ross Stores Inc. analysis uncovered some

relevant facts:

The company is perceived as very reliable and profitable by the stockholders due

to their positive consecutive financial results, a consistent leadership and a

proved strategic behavior.

Even though the off-price retailers thrive most likely during economic recessions,

in the last years the demand for Ross Stores, Inc. products has a consistent

growth and the company expects the customer behavior to keep shifting into the

off-price apparel products.

Consistency and the focus-low-cost strategy are given the company a continuous

increase on the market share within the industry. Moreover, part of this augment

comes from other companies that are targeting products towards brand-oriented

customers.

Finally, the strategy the company has been executing would last for the next few

years. However, in a long term basis other competitors or apparel retailers would

outperform Ross Stores, Inc. in terms of supply chain management and

merchandising. Therefore, if the company maintains its strategic behavior will

most likely lose market share and expansion opportunities.

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