Ross Dresses For Success

7/26/2010


  Recent Price
$54
  Dividend
$0.64
  Yield

1.2%

  P/E Ratio
14
  Shares (millions)
122
  Long-Term Debt as % of Capital
11%
  52-Week Price Range
$58.93 - $41.64

Ross Stores’ ($54; ROST) two discount chains, Ross Dress for Less and dd’s DISCOUNTS, aim to provide a constant flow of fresh merchandise for cash-strapped consumers. Ross, up 27% this year, is one of the best-performing retail stocks in the S&P 500 Index. But the shares still represent a good value at 14 times trailing earnings, 19% below the five-year average P/E.

In fiscal 2010 ended January, revenue rose 11% as same-store sales grew 6%. So far this year, sales climbed 12% for the five months ended June, with same-store sales up 8%.

Ross generated free cash flow of $617 million, or $4.98 per share, in the last four quarters, up 56% from year-earlier levels on wider operating margins. Ross is a Focus List Buy and a Long-Term Buy.

Business breakdown

Between 75% and 80% of Ross Dress for Less shoppers are women, usually from middle-income households. They look for brand-name clothing, home supplies, and accessories at sharp discounts. These shoppers tend to enjoy the treasure-hunt format, which drives them to visit the stores an average of three times a month. The roughly 970 Ross Dress for Less stores typically occupy 30,000 square feet in suburban centers, mostly in the southern and western states.

Launched in 2004 in California, dd’s tends to attract a younger demographic with a lower income. The more than 50 dd’s stores are located in California, Texas, Florida, and Arizona. Management views the chain’s expansion as a long-term growth opportunity.

Stores at both chains carried leaner in-store inventories in the last two quarters. This strategy offers several advantages: faster inventory turnover, fresher product mixes, lower working capital, and fewer markdowns.

The use of opportunistic buying helps shield Ross from economic downturns. The strategy has proven particularly useful in recent months, reflecting weakness in consumer spending.

Many retailers place inventory orders four months in advance, and some chains are apparently trying to cut or defer orders. Ross makes its purchases later in the buying cycle, which allows the retailer to scoop up such unwanted inventory — at a deep discount, of course.

Conclusion

Off-price retailers have held up better than most over the last year, and Ross believes consumers will continue to seek out bargains. Management says it expects same-store sales to be up 3% to 4% for the July quarter, with per-share profits of $0.95 to $0.99, up 16% to 21%. Comparisons get tougher in the second half, prompting Ross to project flat profits and same-store sales in the final six months of fiscal 2011. For the full year, management expects per-share earnings to rise 16% to 20%.

The company plans to expand its store base 4% to 5% this year, adding about 35 Ross stores and 15 dd’s. The company has no presence in the Midwest or New England, so it has plenty of opportunities for expansion. 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

Apr '10 $1.16 vs. $0.72 + 14% $58.93 -

$44.92

17 - 13
Jan '10 1.16 vs. 0.76 + 14% 47.36 - 42.30 15 - 13
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
           
Year
(Jan.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2010 $7.18 $3.54 $0.49 $50.50
-
$28.08 14 - 8
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
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
99 80 76 97 80 88 77

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


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