Ross Dresses Up In Down Economy

1/31/2011


  Recent Price
$66
  Dividend
$0.64
  Yield
1.0%
  P/E Ratio
15
  Shares (millions)
119
  Long-Term Debt as % of Capital
10%
  52-Week Price Range
$66.58 - $44.04

Apparel retailers in the S&P 1500 Index enjoyed a strong rebound over the last year, providing investors an average total return of 30% and reporting 8% higher sales despite an average decline of 3% in days of inventory. Ross Stores ($66; ROST) has bettered its peers on all three counts, with the stock returning 50%, sales surging 11%, and days of inventory declining 10%.

Heading into the holiday season, heavy promotions offered by specialty and department stores represented a threat to Ross's competitive position as a discounter. But early results have been positive. Ross closed out the calendar year by crushing Wall Street estimates, with same-store sales advancing 6% in November (versus 2.8% consensus) and 4% in December (versus projected 0.5% decline).

Despite solid operating momentum, the stock's valuation still seems reasonable. At 15 times trailing earnings, Ross trades at a 16% discount to its peer-group average. Ross is a Focus List Buy and a Long-Term Buy.

Business breakdown

Ross operates two discount clothing chains with more than 1,050 stores in 27 states. Management looks to increase its number of stores at least 6% in the year ahead, expanding primarily in existing markets. The discounter is notably absent from the Midwest, New York, and New England, potential areas for long-term expansion.

Off-price buying allows Ross to offer substantial discounts. Purchasing merchandise later in the seasonal buying cycle, Ross scoops up product overruns and canceled orders, often acquiring prestigious brands. That inventory, dubbed packaway, is then stashed in a warehouse, sometimes until the season begins again next year. As of Oct. 31, packaway goods, which tend to generate higher profit margins, accounted for 37% of total inventory, versus 32% in the prior year.

On average, Ross' stores carry 30% less inventory than they did three years ago. Management seems confident about paring inventory even further, using a new strategy that considers customer preferences on a local, rather than regional, level. That tactic should allow stores to stock a higher percentage of fresh inventory, catering to the habits of its treasure-hunting shoppers, who tend to visit the stores about three times a month.

Ross has generated positive free cash flow in eight consecutive quarters and now holds $733 million, more than $6 per share, in cash on its balance sheet. In that two-year stretch, buybacks have shaved 9% from the share count, while the dividend has jumped 68%. In November, Management hinted about another dividend increase and more buybacks.

Conclusion

Same-store sales climbed 5% in the first 11 months of fiscal 2011 ending January, on top of a 6% gain in the year-earlier period. For January, Ross remains cautious, forecasting a 1% to 2% dip, compared to 8% growth a year earlier. However, earlier this month, Ross increased its per-share-profit guidance for the January quarter to at least $1.32, well above the $1.22 consensus at the time. 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 '10
1.02
vs.
0.84
+ 7%
59.24
-
48.71
14 - 12
Jul '10
1.07
vs.
0.82
+ 8%
58.16
-
50.09
15 - 13
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
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
7.18
3.54
0.54
50.50
-
28.08
14 - 8
2009
6.49
2.33
0.36
41.56
-
21.70
18 - 9
2008
5.98
1.90
0.29
35.17
-
21.23
19 - 11
2007
5.57
1.70
0.24
33.63
-
22.12
20 - 13
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
60
77
96
75
98
51

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


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