Ross Stores Shoots to an All-Time High After Solid Results

Stock (Symbol)

Ross Stores (ROST)

Stock Price


Retail & Travel
Data is as of
October 10, 2016
Expected to Report
Nov 17
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 SharekRoss Stores (ROST) produced solid results last qtr, and investors pushed the stock to an All-Time high. 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. Last qtr the company was expected to put out 6% profit growth for the 2nd straight qtr. But the company delivered 13% growth on a gain in 7% sales including a solid 4% same store sales growth. Profits are now expected to grow at a double-digit rate this year and next, but the P/E of 23 is high as the median annual P/E has been between 8 and 20 the prior ten years.
One Year Chart
rost_2016_q3This is a solid-looking ten-year chart. The stock jumped to another level after it reported last qtr’s earnings. Headlines stated the company upped estimates but the $2.75 estimate for this year is what analysts had 4 qtrs ago (this number went down to $2.71 and up again). Profit Estimates for the next 4 qtrs are 6%, 14%, 12% and 11%. Those are solid figures and if ROST beats next qtr that could mean a string of double-digit profit growth. The company beat by 3 cents 4QtrsAgo, 2 cents 2QtrsAgo, met estimates 2QtrsAgo and beat by 4 cents LastQtr. Next qtr’s estimate is $0.56 and Ross needs to beat that by 3 cents to produce double-digit profit growth.
Fair Value
rost_2016_q3_phThis company has an Estimated Long-Term Growth Rate of 12% a year and pays a 1% yield. I feel 20x earnings is fair for this stock. Note ROST had a P/E of less than 20 in nine of the last ten years. Now all of a sudden investors are giving a premium price to this retailer. I feel things will return to the norm and think investors might be able to buy the stock cheaper if the stock market corrects.
Bottom Line
rost_2016_q3_10yrRoss Stores is 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 a formula for success for a buy-and-hold stock. But the P/E of 23 is high by historical standards and the angle of the chart has increased the past year, thus I feel ROST will cool down some over the next year and give investors a better buying opportunity. But profits are good right now and estimates show double-digit growth well into next year, so we may be waiting a while to get this stock at a reasonable price.
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