Ross Stores Added To The Focus List

2/22/2010


  Recent Price
$47
  Dividend
$0.64
  Yield

1.4%

  P/E Ratio
15
  Shares (millions)
124
  Long-Term Debt as % of Capital
12%
  52-Week Price Range
$50.50 - $28.50

Ross Stores ($47; ROST) is the second-biggest off-price apparel and home-goods retailer in the U.S., behind only TJX ($38; TJX). While apparel sales nationwide declined in the last two years, the off-price niche has delivered consistent growth.

Ross scores in the top 20% of our research universe in five Quadrix® categories and earns a 99 Overall. The stock has risen 9% so far this year and 54% over the last 12 months, yet still represents an attractive value. Shares trade at 12 times projected year-ahead earnings, 16% below the five-year average forward P/E ratio.

The retailer holds $577 million, or $4.66 per share, in cash and short-term investments, enough to pay off long-term debt nearly four times over. And during the recession, Ross has managed to squeeze higher returns from its assets, mostly by making more efficient use of its inventory. Ross, already a Buy and a Long-Term Buy, is being added to the Focus List.

It’s all about the discounts

Ross operates 955 Ross Dress for Less stores and 53 dd’s DISCOUNTS stores. The Dress for Less chain targets middle-income households, offering brand-name merchandise at 20% to 60% below prices typically charged at department or specialty stores. Launched in 2004, dd’s DISCOUNTS caters to lower-income shoppers. These stores feature a different brand mix at lower average price points, with discounts reaching 70% off prices at midrange department stores and discount stores.

The retailer seeks to undercut department and specialty stores with its off-price buying strategy, securing brand-name fashions and other merchandise late in the buying cycle. The company’s buyers scoop up production overruns and canceled orders. Ross will also purchase clothing out of season and stash it in warehouses until the next year. This packaway merchandise represents more than 30% of the company’s inventory.

More growth in store

Ross operates in 27 states and the island of Guam, leaving a large portion of the U.S. market untapped, particularly the Northeast and Midwest. Ross expects to expand its store count by 7% in fiscal 2011 ending January and believes the market can ultimately accommodate at least 1,500 Dress for Less stores and 500 dd’s DISCOUNTS.

Same-store sales rose 6% in fiscal 2010, while total sales advanced 11% to $7.18 billion. Ross expects per-share earnings of $3.53 to $3.54 for fiscal 2010 ended January, implying more than 50% growth. The company is slated to release results for the January quarter and fiscal 2010 on March 18.

Ross typically plows excess cash into buybacks, spending an estimated $300 million on its own shares in fiscal 2010. In early February, Ross launched a $750 million repurchase program, representing about 13% of stock-market value at the current share price. The company also raised its quarterly dividend 45% to $0.16 per share, bringing the indicated yield to 1.4%.

Ross anticipates annual earnings growth of 10% to 15% over the next few years. The consensus projects per-share-profit growth of 10% in fiscal 2011, and estimates are on the rise. An annual report for Ross Stores Inc. is available at 4440 Rosewood Drive, Pleasanton, CA 94588; (800) 989-8849; www.rossstores.com.

ROSS STORES
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Oct '09 $0.84 vs. $0.44 + 12% $50.50 -

$41.64

18 - 15
Jul '09 0.82 vs. 0.54 + 8% 45.75 - 34.74 19 - 14
Apr '09 0.72 vs. 0.60 +9% 41.03 - 28.08 18 - 12
Jan '09 0.76 vs.

0.70

+ 5% 33.32 - 21.70 15 - 10
           
Year
(Jan.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $6.49 $2.33 $0.40 $41.56
-
$21.70 18 - 9
2008 $5.98 $1.90 $0.32 35.17
-
21.23 19 - 11
2007 $5.57 $1.70 $0.26 33.63
-
22.12 20 - 13
2006 $4.94 $1.36 $0.22 31.37
-
22.34 23 - 16
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
99 93 82 98 88 91 56

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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