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Ross Stores Exercises Tight Expense Control to Improve Margins

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Margin improvement

Ross Stores (ROST) has been exercising strict control on its expenses and has been maintaining lean inventory levels to improve its margins.

In fiscal 2014 ended January 31, 2015, the company’s gross margin rose to 28.1% from 28.0% in the previous fiscal year. The company’s operating margin rose to 13.5% in fiscal 2014 from 13.1% in fiscal 2013.

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Factors driving margin improvement

The improvement in Ross Stores’ fiscal 2014 gross margin was driven by a five-basis-point fall in the company’s cost of goods sold as a percentage of sales due to improved merchandise margins. However, this improvement was adversely impacted by a 15-basis-point rise in buying costs.

The company’s improvement in its fiscal 2014 operating margin was driven by a 30-basis-point fall in selling, general, and administrative expenses as a percentage of sales due to tight expense control.

Ross Stores makes up 0.2% of the portfolio holdings of the iShares Russell 1000 Growth ETF (IWF).

Comparison with peers

In fiscal 2014, Ross Stores’ operating margin of 13.5% was better than the margins of off-price peers TJX Companies (TJX) and Burlington Stores (BURL). TJX and Burlington posted operating margins of 12.4% and 5.4%, respectively. Nordstrom (JWN), which operates off-price Rack stores as well as high-end, full-line stores, reported an operating margin of 9.8% in fiscal 2014.

Margins in fiscal 2015

In the first half of fiscal 2015, Ross Stores’ gross margin improved to 29.1% from 28.8% in the comparable period of the previous year. This improvement was driven by a higher merchandise margin and occupancy leverage, partially offset by a rise in freight and distribution costs.

In the first half of fiscal 2015, the company’s operating margin rose by 35 basis points to 14.8%. This increase was driven by a five-basis-point fall in selling, general, and administrative expenses arising from the leverage resulting from the 5% increase in comparable store sales.

This improvement was partially offset by an unfavorable comparison to the comparable period in the previous year, which included a one-time benefit related to the settlement of a legal matter.

Ross Stores’ future margins may be impacted by increases in wage rates. Retailers such as Ross Stores, Walmart (WMT), Target (TGT), and TJX Companies have increased the minimum entry-level wage to $9 an hour.

The next part of this series explores the company’s capital expenditure plans.

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