• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

With Keith managing risk around our cautious view on ROST (shorted again today), we remain convinced that the opportunities to meaningfully exceed both guidance and elevated Street expectations are gradually becoming harder and harder to achieve.  Recall that on November 19th we posted a note suggesting that the anniversary of the best time in recent history for off-pricers is now upon us.  When you add in eight quarters in a row of inventory declines (while sales have accelerated) it remains hard to envision anything but a deceleration in momentum is on the horizon.  There is no question that this has been a great run, as it has been for other retailers benefitting from value pricing and the consumer trade-down effect.  But, if you’re curious what could happen while results remain robust on an absolute basis, with growth continuing at a decreasing rate, take a look at Aeropostale’s recent performance. 

Check out this historical perspective below, which takes a detailed but long look at the relationship between the industry’s inventory management (represented by the Sales/Inventory spread) vs. ROST historical same-store sales.  The Sales/Inventory spread for clothing and accessories retailers is currently at its widest margin since before 1996.  Truly amazing!  We then line this up against Ross’ topline results and you will see that ROST’s same-store sales exceed the Sales/Inventory spread far more frequently than not, 138 months out of 166 or 83% of the time.  In fact, of the 28 times the sales/inventory spread outpaced comps over 13 years, 3 have been since September of this year alone.

The cleanliness of the inventory pipeline for retailers and manufacturers alike is about as good as we’ve ever seen and as a result, there are simply less “quality”  goods for ROST to procure.  Additionally, with fewer units floating around in the pipeline, we should begin to see ROST (and others) no longer being able to buy as close to need as we have seen over the past year.  This should have an adverse impact on inventory turns as well as the industry’s ability to flow fresh, unique good as frequently.  All this points to diminishing upside on margins and earnings…

 

ROST: Can it Get Any Better? - ROST SInv vs Comps 12 09

 

 

ROST: Can it Get Any Better? - ROST SInv Spread vs EBIT 12 09