Editor's note: The original article contained a gross margin number that did not reflect a change in accounting by the company in FY 2002. We regret the error.
Yesterday, Ross Stores
With positive earnings and a strong rebound in the share price from the lows in August, one might assume that things are hunky-dory. But I'm concerned about the long-term deterioration of the off-price retailer's margins, because lower margins are never positive for a company's share price. We might already be seeing the effects; even with the recent rebound, Ross still trades below its peak in early 2004.
The good news? Even with falling margins, Ross's economics remain positive. The company continues to generate positive free cash flow, which tallied $149 million for the past nine months. Furthermore, continued increases in same-store sales have helped to maintain the company's operating leverage. Unfortunately, these results will continue to attract competition and put pressure on Ross's profits.
The competition isn't just from TJX Companies
The bottom line is that Ross has a good business model that continues to grow and create value for its shareholders. However, as a long-term investor, I would keep an eye on those profit margins as a marker for the company's ability to continue to create value.
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