ROST: KM Stepping Up the Short -- Again
Keith dipped his toe back in the water again on ROST today, shorting a name that we’ve been on the cautious side on for a while. We remain convinced that the opportunities to meaningfully exceed both guidance and elevated Street expectations are gradually becoming harder and harder to achieve. 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.
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. Tough to argue with that one… 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, 139 months out of 169 or 82% of the time. In fact, of the 30 times the sales/inventory spread outpaced comps over 13 years, 5 have been since September of last 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. This is one of those names where we don’t need to see earnings collapse to be right, but rather simply stop going up.