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Ross’s 60%-Off Nikes Set to Overtake Gap With Thrifty Customers

Ross’s 60%-Off Nikes Set to Overtake Gap
Pedestrians pass in front of a Ross Stores Inc. location in San Francisco, on Aug. 31, 2011. Photographer: Noah Berger/Bloomberg

Ross Stores Inc. is gaining on rivals as its 60 percent discounts on Calvin Klein shirts and Nike sneakers win customers seeking bargains amid a slowing economy.

At $8.74 billion in market value, Ross is about $78.5 million shy of overtaking Gap Inc., while having a third of the stores and no online sales. Ross shares have climbed 18 percent this year, while Gap has dropped 28 percent.

Chief Executive Officer Michael Balmuth keeps promotions and fashion displays minimal to maintain low prices while placing buyers in New York and Los Angeles to guarantee hip merchandise. The strategy has worked amid high unemployment and falling consumer confidence, and Ross last month raised its forecast for profit this year after second-quarter sales gained 9.3 percent.

“Consumers haven’t ever fully recovered from 2008 and tradedowns to cheaper merchandise aren’t embarrassing for people anymore,” Pamela Quintiliano, an analyst with Oppenheimer & Co. in New York, said in an interview. “As department stores continue to restrain orders, factories in China are willing to sell to Ross to stay in business.”

The first Ross location opened in San Bruno, California, in 1957 as a full-priced department store. The chain shifted to discounting in 1982 in the San Francisco Bay area. Business has boomed steadily since the start of the recession, with sales rising 41 percent since 2007 to $7.87 billion in the company’s most recent fiscal year.

Ross Expansion

Ross now has about 1,000 locations, compared with 3,300 for San Francisco-based Gap’s namesake, Banana Republic, Old Navy, Piperlime and Athleta brands. Ross recently expanded to the Midwest for the first time and will open 12 stores in the Chicago area by October, Balmuth, 61, said on a conference call last month.

Brittany Mohr, a spokeswoman for Pleasanton, California-based Ross, said the company and executives declined to comment.

While Ross focuses on guaranteeing the best prices, Gap is seeking to boost sales in its namesake line with a fall advertising campaign to attract the twenty-something crowd.

The overhaul, led by Chief Marketing Officer Seth Farbman, includes a new look for the stores, clothing and ads. Gap spent 13 percent more on marketing in the second quarter, Chief Executive Officer Glenn Murphy said on a recent call with investors. Product costs will increase 20 percent in the second half, the company said.

Gap’s brands are expanding internationally, especially in China, and the stores’ design improvements will be evident by the spring 2012 season, said Louise Callagy, a spokeswoman.

Apparel Prices

Ross stands to benefit because higher apparel prices are hurting its rivals, said David Mann, an analyst at Johnson Rice & Co. in New Orleans.

“Ross is positioned well to benefit from an uncertain macro environment and a period of rising apparel inflation,” Mann said from New York. “The buying environment is highly favorable for them.”

While Ross’s focus on lower-income consumers has worked so far, it may be challenged if the recent market slump hurts its customers even more, said Howard Tubin, an analyst with RBC Capital Markets in New York.

Confidence among U.S. consumers in August plunged to the lowest level in more than two years, with the Conference Board’s index slumping to 44.5, the weakest since April 2009, from a revised 59.2 reading in July.

Unemployment Rate

The Labor Department was expected to say today that the U.S. unemployment rate held at 9.1 percent last month, the average estimate of 80 analysts in a Bloomberg survey. That would mark the 25th month in the last 27 that the rate has been at 9 percent or higher.

The chain also may struggle to expand in the U.S., Tubin said in a telephone interview. Ross is mostly prevalent in the West and South, regions without cold winters, and could struggle providing merchandise for multiple seasons, he said.

For now, the retailer is benefiting from discount shoppers seeking an adrenaline rush from the “treasure hunt” of sifting through the store’s selection, Quintiliano said.

Shoppers at Gap and other specialty retailers have come to expect discounts, and are more likely to leave an item they like until it goes on sale elsewhere, she said.

“There’s a level of psychological excitement,” she said. “You never know what you’re going to find.”

Lupe Soris, a 31-year-old cosmetologist, said she has been shopping at the Ross location in Emeryville, California, for 11 years. She recently bought shoes for herself and her 3-year-old son.

“It’s cheaper than J.C. Penney, Macy’s, Marshalls,” Soris said. “And it’s good quality.”

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