About a dozen people emailed me after last week's column to ask questions or share their thoughts on Ross Stores (Nasdaq: ROST). Among them were three emails that I found troubling:
From Sue Waterman:
"I wandered into two or three Ross stores to see what fall name-brand clothes I could pick up at bargain prices -- something I've been doing in early fall for years. Was saddened and disappointed at the almost total lack of quality clothing -- Jones, Rena Rowen, etc. -- given that a designer sale was being actively promoted, and by the very reduced overall stock levels in the Portland store -- large gaps in the racks with nothing on them. In one store two male managers were complaining loudly and continuously about work conditions, in a Seattle store there did not appear to be any management and what clothing there was appeared in heaps on the floor with no employees picking up and tidying. It had the feel of a company that had overextended its management team and was desperately short of good, effective people, and was having problems getting enough better quality merchandise for all its stores.
"Frankly, I wondered if they were having problems paying their better suppliers -- it had the same atmosphere as Eatons in Canada just before they went under. They definitely have some operational problems going on in the West, and reading your article I suspect they are a symptom of something a little larger...."
From Wendy Williams:
"I went shopping at my local Ross Store this weekend and was shocked. It looked like they were going out of business. The racks were almost bare. What was there was of inferior quality. The merchandise on the shelves was thrown around or on the floor. The store was almost empty. Marshalls, down the street was busy, fully stocked and appealing.
"I am new to investing and have not yet shorted a stock, but when I left Ross I was wondering how it is done.
"Take it from a 'professional shopper,' Ross is going down hill very fast."
Reader 3:
"As a manufacturing sales representative that does a huge volume with the Marmaxx group [TJX Companies (NYSE: TJX)], I understand your apprehension on Ross. I sell all the goods I can get my hands on to the Marmaxx Group. When I show the same goods to Ross, they tell me it's the wrong thing. This may not seem like much to you but if you multiply this by all the sales people that call on these accounts (in most cases it's the same sales people) you get an idea of what's going on.
"The buying staff at the Marmaxx group (these are the people that buy the goods that bring people into the stores -- that's where sales start) is the most professional in the industry. The buyers at Ross leave a lot to be desired. I know you do not think this means much, but without the right goods to sell, everything else means nothing."
Whoa! I don't want to read too much into a few anecdotes, and I know that Ross doesn't try to be a full-service store (that's how it keeps its prices low), but those emails really bother me. And not a single person emailed me to share anything positive about Ross.
I would welcome further comments from readers about Ross -- both positive and negative -- and if I get enough interesting responses, I will share the results in a future column.
Debt
The day after last week's column on Ross Stores, the company released its 10-Q for Q2 '00, which showed $11.8 million of short-term debt, in addition to the $80 million of long-term debt that it had reported in its earnings release. This means the chart in last week's column needs to be revised so that Q2 '00 shows $92 million in total debt:
Ross Stores' Short-term Plus Long-term Debt (millions)
2000 1999 1998 Q1 $20 $0 $0 Q2 $92 $17 $38 Q3 $53 $74 Q4 $0 $0
Then I got to thinking that total debt isn't what matters -- it's debt net of cash that I care about. Here is the same chart, which shows Ross' cash and cash equivalents minus all debt:
Ross Stores' Net Cash (millions)
2000 1999 1998 Q1 $13 $33 $30 Q2 -$50 $13 -$6 Q3 -$21 -$47 Q4 $79 $80
How much do you want to bet that the Q3 '00 net cash approaches negative $100 million?
Conclusion
I don't make hasty investment decisions, so I'm still holding my modest position in Ross, but at this point, I'm more inclined to be a seller than a buyer. I'll be keeping a close eye on future developments.
-- Whitney Tilson
Whitney Tilson is Managing Partner of Tilson Capital Partners, LLC, a New York City-based money management firm. Mr. Tilson appreciates your feedback at [email protected]. To read his previous guest columns in the Boring Port and other writings, click here.
