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Kevin Kersten's Analyst Insights

Options Analyst Writer
Kevin Kersten
Author Bio

August 12, 2013 - Add Style and Discounts to your Portfolio

Sometimes a company needs to operate by different rules in order to be successful. We have all gone into a store looking for bargains, a nice mix of merchandise or with a goal of coming out with a specific item. Sometimes we enter stores based on expectations of finding bargains. Shopping is a very American pastime and we do well with healthy disposable incomes, products shipped in from around the world and companies trying to offer us the latest, coolest, most stylish thing.

Being noticed in that new outfit brings joy, attention and gets the looks people want. Otherwise they would not spend the money on it. Style makes a statement about your personality, tastes, wealth, and status. Honestly, we judge people quite heavily based upon appearances.

Times are tough and people do not have as much money as they would like.  Just because disposable incomes have dropped, it does not mean our desires for fashionable clothing has changed. One company has a unique model that is doing really well in these economic circumstances.

Ross Department Stores (ROST) is known for its "Dress For Less" catchphrase. The store has name brand designer apparel. Going into the store at first glance it might look like any other retail store. Upon closer inspection you might be surprised to see every item individually marked with a price.  (Many other stores simply mark the shelf and not the item.)  The product mix is also less organized based via product and more on shelf space. Upon looking at shirts on a rack you realize there is a variety of sizes and styles. While organized by size, there is no guarantee if you see one shirt you like that there is another one of a different size. When you look at the price, you may well be impressed seeing discounts of 40-60%. The name brand labels may indicate you are still getting a quality product, and the style may be one from last year, but it can still look good and can add some flair to your wardrobe.

Ross has a habit of buying factory overruns, unsold inventory and surplus fashions. Things that may not have sold as well as hoped and so now this inventory needs to be liquidated. Ross may buy the goods then pack them away until the next year. This can send fashion basics out to the racks a year later, filling up shelves of its discount stores in the appropriate season. This strategy is unique, as most stores sell out of clothing items, deeply discounting them or sending them back to be sold in bulk lots -often overseas. The strategy has been working in recent years as sales and profits have risen. In fact, Ross may benefit twice, first if consumers do not have the money to buy the product at a regular store the product gets returned. Ross buys it and then marks it down selling it to the consumer making money both by the cheap acquisition and the sale.

Ross has 1,200 stores in 33 states and still has room for growth. The company expects it could support about twice that number of stores. The company reported a 3% same store sales increase and a 6% total sales. The company is slated to open 80 new stores this year, something not a lot of companies are doing in these days.  Revenues have climbed from $6.4 billion in 2009 to $9.7 billion in FY2013. At the same time profits have risen from 1.17 per share to 3.53 per share. Expectations for FY 2014 are $10.3 billion in sales and $3.95 in EPS.  Revenues from the store are split between ladies (29%), home accents (24%), men 13%, accessories (13%), shoes (13%) and children's (8%).

Ross has done well with its strategy and selling a covered call has some similarities. If you buy as stock and sell a covered call on it your cost is lowered. With ROST stock at 66.88 one can sell a January 2014 67.50 call option for 3.70. (66.88-3.70=63.18). The covered call trade has 5.5% of downside protection and a 6.8% assigned return.  There is a sense where when you buy a stock and sell a covered call you are buying that stock at a discount today in hopes of selling it later when the price rises. This call is a little out of the money so hopes are the stock will rise from 66.88 to above 67.50 at expiration. (That is less than a 1% rise.) While a 5% discount is not as much as a 50% discount seen on clothing, given the stability of stocks and the way they don't go out of fashion quite so quickly this could still be a real value. This stock also pays about a 1% dividend.

Clearly Ross has done well the current environment and their unique and intriguing strategy has been doing better than average. Just like Ross, clothing has some timeless designer styles, and making money investing doesn't go out of style either. Maybe Ross can bring value and fashion into both your closet and your portfolio.

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