Stock (Symbol)

Ross Stores (ROST)

Stock Price

$57

Sector

Retail & Travel

Data is as of

April 16, 2016

Expected to Report

May 19

Company Description

Ross Stores, Inc. is an off-price retailer of name brand and designer apparel, accessories, footwear, and home fashions for the entire family. The Company operates two brands of off-price retail apparel and home fashion stores, Ross Dress for Less (Ross) and dd’s DISCOUNTS. As of December 31, 2014, the Company operated 1,210 Ross locations in 33 states, the District of Columbia and Guam, and 152 dd’s DISCOUNTS stores in 15 states. The Ross and dd’s DISCOUNTS stores are supported by five distribution centers. The Ross brand stores offers its products at savings of 20% to 60% off department and specialty store regular prices every day. Ross’ target customers are primarily from middle income households. The dd’s DISCOUNTS stores offers its products at savings of 20% to 70% off moderate department and discount store regular prices every day. Its target customers typically come from households with moderate incomes. Source: Thomson Financial

Sharek’s Take

Ross Stores (ROST) sells clothing and home goods at 20-60% off department store prices. Ross was launched in 1982 in the San Francisco Bay area when 6 junior department stores were acquired and converted into Ross Dress for Less off-price stores. The company went public in 1985 and now has approximately 1300 Ross stores and 200 dd’s DISCOUNTS locations. Launched in 2004, dd’s DISCOUNTS targets younger households with more moderate incomes than Ross. Ross adds around 20 dd’s locations a year in addition to 70 Ross stores, and management feels it can almost double its total store count to 2500 someday. Significant growth opportunities lie ahead for both concepts as Ross is only in 34 states, dd’s in just 15 states. Ross has minimal debt, thus management spends hundreds of millions on stock buybacks and dividends each year. The dividend has increased every year since 1993 and the yield is 1%. With an estimated long-term growth rate of 11% the stock has a total estimated return of 12% and sells for 21x earnings. ROST had a median P/E between 8 and 20 the past decade, thus at this time I feel the stock is high.

One Year Chart

Last qtr Ross delivered 10% profit growth on 7% sales growth, with 4% same store sales growth (SSS). Management lowered profit estimates a bit, but I feel they underpromised to overdeliver. ROST had been growing SSS 4% for at least two years and forecasted 1% growth going forward — yeah right. I think ROST just wants to beet the street, as its done every qtr since the Summer of 2014 (even then it missed by a penny). Profits are expected to grow 6%, 11%, 8% and 9% the next 4 qtrs as higher wages take a bite out of profits. But if ROST beats the street it could attain double-digit profit growth.

Fair Value

It’s hard to believe we could have bought this stock for 8 to 10 times earnings. I really dropped the ball not getting in. But at the time I was focused on growth stocks with 20% profit growth. Over time I have learned solid steady growers often outperform sexy growth stocks. My Fair Value on this stock is 18x earnings, which is $49. With ROST at $57 we may get a better buying opportunity this Summer.

Bottom Line

Ross Stores is a quality company. Growing the store count, increasing same store sales at a modest rate, paying a dividend and buying back stock is an excellent recipe for success. My only issue is the P/E of 21 is high with profits growing around 10% right now. I have ROST on my radar and will look to buy on a dip for conservative accounts.