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Ross Stores Continues to Deliver Growth as Retailers Fade

Stock (Symbol)

Ross Stores (ROST)

Stock Price

$65

Sector
Retail & Travel
Data is as of
January 8, 2017
Expected to Report
Feb 28
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 SharekE-commerce has taken the wind out of the sales of most retail stores, but for the 2nd straight qtr Ross Stores (ROST) produced double-digit profit growth as investors pushed the stock to All-Time highs. 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 ROST delivered 17% profit growth on an 11% gain in sales with an impressive 7% jump in same store sales. People are shopping at Ross more than ever! My only issue is the stock sells for 21x earnings, which is much higher than its 12% Est LTG and the ten-year median of 13. My 2017 Fair Value is 20x earnings, or $63 a share. Great stock and super company, but the good news seems to be already priced in.
One Year Chart
Wow, 17% profit growth on 11% sales growth. I thought this company was more mature than that. Well, 7% same store sales growth makes it so you don’t have to open many stores to grow profits. BTW the company opened 25 new Ross and 9 new dd’s DISCOUNTS stores last qtr, and now has 1338 Ross stores and 192 dd’s overall. Profit Estimates for the next 4 qtrs look good, with 14%, 12%, 11% and 8% profit growth expected. The P/E of 21 is much higher than the Est. LTG if 12% per year, but this is a quality company and deserves a rich multiple…
Fair Value
…just not this high. A high-teens multiple is probably what the stock is worth normally. But with the stellar results ROST has been posting, I feel the stock is worthy of a 20 P/E. That puts my 2017 Fair Value at $63, which is below the recent quote of $65. The stock also yields 1%. This is a great case study on why you should buy stocks when the P/E is low. ROST had a P/E between 8 and 11 between 2009 and 2012 — and was recording record profits each year! Although the growth rate wasn’t great, the stock had huge upside if the P/E would get back to normal. Not only did the P/E return to the mid-teens, it went way beyond, as trends normally last longer than you think they will.
Bottom Line
Ross 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 one of my favorite recipes for success! With a P/E of 21 the stock is a little too high to buy, but at least that’s down from the 23 P/E it had last qtr. This is a wonderful stock to own — if you’re already in it — but I am trying to hold off for a better entry point. ROST is on my radar, and I would like to buy it for the Conservative Growth Portfolio in the $50s.
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