I Don’t Understand the Investor Infatuation With Ross Stores

Stock (Symbol)

Ross Stores (ROST)

Stock Price


Retail & Travel
Data is as of
July 8, 2016
Expected to Report
Aug 18
Company Description
rossstores_storefrontRoss 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
David SharekI don’t understand the investor infatuation with Ross Stores (ROST). ROST is expecting 8% profit growth this year yet the stock’s rewarded with a 21 P/E? Now this is a good stock, but the estimated long-term growth rate is just 11% a year and when you add in the 1% dividend that’s an estimated 12% total return. I think this $57 stock is worth 18x earnings, or $49 a share. It’s even higher than my 2017 Fair Value o of $54. Rost Stores sells clothing and home goods at 20-60% off department store prices. The company began 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. Ross 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. ROST 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. This company has little debt, thus management spends hundreds of millions on stock buybacks and dividends each year. The dividend has increased every year since 1993. This is a great stock for conservative accounts — if you’re in at a lower price. For those of us who are not, I think we should wait for a 20% correction.
One Year Chart
ROST_2016_Q2Last qtr wasn’t a good one. Management had previously lowered profit estimates a bit, and I felt they were underpromising to overdeliver. But that wasn’t the case as ROST didn’t beat the street. Profits grew just 6% — the slowest growth in more than a year — as sales increased just 5% with 2% same store sales growth. Profit estimates for the next 4 qtrs are: 6%, 8%, 11% and 12%. We can’t assume double-digit growth is on the horizon as for the 2nd straight qtr management lowered next qtr’s estimate. This time from $0.70 to $0.64-$0.67.
Fair Value
ROST_2016_Q2_PHLook, this stock could have been had for 8 to 11 times earnings around 5 years ago. There’s no way I’m paying 21x when profit growth is in the mid-single digits. 
Bottom Line
ROST_2016_Q2_10yrDespite my negative outlook, Ross Stores is a quality company. It’s a well oiled machine that grows its store base, increases same store sales at a modest rate, pays a dividend and buys back stock. That’s the formula top-tier management teams use to grow the stock on a consistent basis. I bet smart mutual fund managers own this stock. My only issue is the P/E is high and profit growth is low, thus I would wait for a 20% correction before climbing aboard. This is a posterchild for value outperforming growth during the last year, and ROST makes me think growth is now about to take center stage.
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