University of South Florida. College of Engineering. Department of Industrial & Management Systems Engineering. Ross Stores Inc.

Transcription

1 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

2 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

3 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

4 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 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 FY 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

5 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.

6 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 locations in February 2013 (Ross Stores, Inc Annual Report), making it the largest off-price apparel retailer in the United States as shown in Figure 1. (p. 8).

7 Figure 1: Store distribution Guam DC Delaware Wyoming Indiana Kentucky Kansas Arkansas Montana Mississippi New Mexico Idaho New Jersey Louisiana Missouri Utah Hawaii Oklahoma Alabama South Carolina Maryland Colorado Oregon Tennessee Nevada Virginia North Carolina Illinois Washington Pennsylvania Georgia Arizona Florida Texas California 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

8 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, 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 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:

9 Table 1: Revenues 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% Net earnings (as a percent of sales) 8.2% 8.1% 7.6% 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.

10 Products categories: During 2013, the company generated revenues through the following product Table 2: Product categories Percentage of the Product Category 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 Percentage of the total revenues in FY2013 Ladies 13% 13% 13% 8% 29% 24% Home accents and bed and bath Accessories, lingerie, fine jewelry and fragrances Shoes Men s Source: Ross Stores Inc, Investor Overview, August 2014

11 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.

12 Industry Competition The family clothing retail US industry (NAICS ) 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 priceconscious 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.

13 Figure 3: Market Share Market share The TJX Companies Inc. GAP Inc. Ross Stores Inc. Abercrombie & Fitch Co. Others 3.9 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 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 Internetbased 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,

15 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.

16 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 fulltime employees and 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

17 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).

18 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

19 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).

20 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:

21 Table 5: IVA Report 2013 IVA Report (ESG pillar performance) Score Industry Percentile Environmental th Social th Governance th 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.

22 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

23 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.

24 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

25 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)

26 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 (Ross and dd s discounts) located in 33 states (figure 1) and each business unit has some strategic features.

27 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 to 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).

28 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 ( 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 units within the United States, where 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.

29 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: Ratios Company Financials Profitability Ratios 02/01/ /02/ /28/ /29/ /30/2010 ROA % (Net) 22,19 22,2 20,54 18,91 17,33 ROE % (Net) 44,49 47,49 46,64 44,68 41,23 ROI % (Operating) 66,11 70,29 68,23 65,17 59,35 EBITDA Margin % 15,14 14,99 14,21 13,57 12,24 Calculated Tax Rate % 37,67 37,8 37,6 38,15 38,38 Revenue per Employee Liquidity Ratios Quick Ratio 0,36 0,5 0,52 0,65 0,68 Current Ratio 1,34 1,43 1,43 1,51 1,47 Net Current Assets % TA 12,17 16,59 17,52 22,17 20,04 Debt Management LT Debt to Equity 0,07 0,08 0,1 0,11 0,13 Total Debt to Equity 0,07 0,08 0,1 0,11 0,13 Interest Coverage - 184,12 103,03 94,74 95,63 Asset Management Total Asset Turnover 2,71 2,74 2,69 2,68 2,81 Receivables Turnover 167,86 173,16 179,4 176,03 168,7 Inventory Turnover 5,97 5,99 5,63 5,85 6,08 Accounts Payable Turnover 12,93 12,19 11,29 11,06 12,06 Accrued Expenses Turnover 43,06 39,06 35,7 34,8 37,03 Property Plant & Equip Turnover 6,09 6,99 7,76 8,19 7,6 Cash & Equivalents Turnover 19,18 14,75 11,64 9,85 13,22 Per Share Cash Flow per Share 4,81 4,4 3,64 2,86 3,62 Book Value per Share 9,41 8 6,58 5,64 4,71 Source: Ross Stores, Inc., 2014, Mergent Online website

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

31 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.

32 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

33 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 SWOT MATRIX Opportunities Threats 1. Intense competition in the retail 1. Expansion to penetrate into the US environment 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 Weaknesses 1. Lack of presence in e-commerce platform 2. A shift in the behavior of shoppers towards low-priced branded products 2. Regulations concerning the quality and safety of products 3. Increase in operating cost due to rising labor Alternative 1: Expand the existing base of stores through other states and locations to saturate the U.S. demand Alternative 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 on that market 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

34 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.

35 Figure 9: Ross Stores, Inc. Executives James S. Fassio Title : President Tenure : 26 Total Compensation : $4,043,561 Status : Active Age : %Change : Michael Balmuth Title : Executive Chairman Tenure : 25 Total Compensation : $6,231,026 Status : Active Age : %Change : Barbara Rentler Title : Chief Executive Officer Tenure : 28 Total Compensation : $4,828,713 Status : Active Age : %Change : 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.

36 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 FY 2013 Company Name Revenues Gross Margin Net Income Employees Share Price The Gap, Inc. $ ,97 $ ,85 Ross Stores, Inc. $ ,05 $ ,28 Source: Mergent Online webpage, 2014

37 Finally, reviewing the financial ratios of both companies (Table ), Ross Stores, Inc. appears to be more profitable since its ROI was compare to 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 Ratios ROSS THE GAP Profitability Ratios 02/01/ /01/2014 ROA % (Net) 22,19 16,76 ROE % (Net) 44,49 43,1 ROI % (Operating) 66,11 50,14 EBITDA Margin % 15,14 16,59 Calculated Tax Rate % 37,67 38,84 Revenue per Employee Liquidity Ratios Quick Ratio 0,36 0,8 Current Ratio 1,34 1,81 Net Current Assets % TA 12,17 25,29 Debt Management LT Debt to Equity 0,07 0,45 Total Debt to Equity 0,07 0,46 Interest Coverage - 38,38 Asset Management Total Asset Turnover 2,71 2,11 Receivables Turnover 167,86 40,84 Inventory Turnover 5,97 5,35 Accounts Payable Turnover 12,93 13,57 Accrued Expenses Turnover 43,06 35,78 Property Plant & Equip Turnover 6,09 6,02 Cash & Equivalents Turnover 19,18 10,9 Per Share Cash Flow per Share 4,81 3,71 Book Value per Share 9,41 6,87

38 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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40 Ross Stores Inc. (2014) Annual Report. Web. Ross Stores Inc. (2014). Investor Overview August Web. Ross Stores Inc. (2014). Corporate Responsibility. Web.